India, Prudence and FDI

The Indian Prime Minister’s, Manmohan Singh, recent announcements about new economic reforms, particularly the 10% divestment of public sector companies, is movement in the right direction.

India is satisfied that it has avoided the worst of the global financial crisis, its conservative banking system and high capital ratio have protected it from the worst of the global turmoil. However, this conservatism works both ways, yes it reduces risk, but it also limits access. In India, this means millions of potential entrepreneurs are excluded from the financial systems that they can use to prosper. Prudence is good, but too great a level can limit growth and exclude too many members of society. To accelerate the rate of growth India should, perhaps, be a little less prudent.

Relatively low levels of FDI in India, only $121 billion over the last 8 years, are a mystery to me. India represents a fantastic investment opportunity and the levels should be higher. Recent Figures have shown a 9.1% increase in industrial production from last year, and the Government’s commitment to $500 Billion in infrastructure investment, a figure that will be far higher when including the Private Sector contribution. The IFC, the World Bank’s private sector arm, decision to increase India’s exposure from the $3.4 Billion or 10% of its portfolio last year, are all signs of confidence in India’s policy and growth. As one of the few countries where economic activity is near levels hit before the economic crisis, India will prove to be one of the most attractive investment destinations over the coming years.