Absorbing foreign capital inflows

Absorbing foreign capital inflows

Prime Minister Narendra Modi’s scheduled deliberations with global fund houses on Thursday on how to accelerate the flow of international investments into India is timely. To the extent footloose global capital, whose quantum has gone up by the trillions of dollars worth of ‘quantitative easing’ by the US Fed, European Central Bank, Bank of Japan and Bank of England in the wake of the pandemic-induced slowdown, can find its way into real capital formation, instead of merely inflating asset prices, both the providers of capital and the projects that receive the capital will gain.

Had India had a deep and liquid corporate debt market, the job of attracting capital to India would have been relatively easy. But India does not have such a market. This means that global capital has to flow into specific projects and stay put for some time, pushing up the cost of the capital. Another possibility is for the government to sponsor special purpose vehicles to receive foreign capital, offering a guaranteed return in dollar terms, sparing investors the risk of rupee depreciation. Sound macroeconomic management on a sustainable basis and regular increase in local productivity above the rate of productivity gain in developed countries are preconditions for such a strategy to succeed. If sufficient capital is drawn into a large enough number of commercially viable infrastructure projects that, together, are guaranteed to raise the economy’s productivity significantly, such an enterprise can be managed. The National Infrastructure Pipeline can come in handy, in this context, which has identified 7,269 projects worth a combined $1.5 trillion.

There can be no let-up in the effort to create a functional market for corporate debt. The deeper and more liquid the market, the easier it is for foreigners to invest their capital in India, with the government having to provide little more than integrity of accounting and governance. The goal should be to make capital inflows automatic, rather than mediated at the highest level of the government.