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Economy Dec 8, 2011

Foreign investors shun India as it runs scared from big bang reforms

By Uttara Choudhury

New York:Foreign investors watched dismayed as Prime Minister Manmohan Singh's government took "one step forward, two steps back" on a major retail reform to appease opposition parties and waspish allies.

They know it is unlikely the government will evolve a political compromise on the issue during the ongoing session of Parliament, which ends on 21 December. They don't expect the hobbled PM to make new investment and regulatory changes needed to sustain the economic transformation that he unleashed two decades ago. In contrast, Singh as finance minister 20 years ago won global respect for attacking regulatory burdens that held back private companies, helping propel a 247 percent surge in GDP.

"The Manmohan Singh government has won a temporary reprieve from protestors, but it has come at the cost of enhancing India's investment environment," said hedge fund manger Joseph S Bradley.

Foreign investors feel that in the midst of the chaos, corruption and zap that is in India, Singh has failed to keep a firm grip on the economy.AP

Foreign investors feel that in the midst of the chaos, corruption and zap that is in India, Singh has failed to keep a firm grip on the economy. India's investment climate is so indifferent that foreign investors have moved on to emerging economies like Thailand, Indonesia and Brazil which have laid out red carpets for them. Foreign direct investment in India fell 31 percent to $24 billion last year even as investors flocked to developing nations as a group and in November alone, foreign investors pulled $661 million out of the Indian stock market.

Data from the Securities and Exchange Board of India shows foreign portfolio investors have so far dumped Indian equities pell-mell in 2011, in sharp contrast to the $29 billion they invested in 2010.

"Investors are pulling out money and India is no longer the darling of the investment community. Over the last few years, we've quietly ignored policy-makers in the hopes that industrialists would find ways around them; that cannot continue indefinitely. The country cannot sustain such high growth with this government, which is enacting a comedy show for the world to witness," said Krishna K Gupta, general partner in Massachusetts-headquartered Romulus Capital.

"India wants FDI - there is no doubt about that. But it is unable to execute on its goals. Incompetence is the problem we face and this derives, in my opinion, from the lack of power at the Centre," added Gupta.

The drop in portfolio inflows and the hefty current account and fiscal deficits have been a key factor behind the rupee's sharp decline. India relies heavily on portfolio inflows-foreign purchases of shares and bonds-as a means of covering its current account gap. And, just when India needs to attract sufficient foreign money, namely US dollars to close the gap, you have a fracas over the long-awaited opening of India's retail market. Singh's government has not been able to push through a single notable reform initiative since it was re-elected in 2009.

"The turnaround is the latest sign of weak leadership and a lack of direction by India's Congress Party-led government, which is beset by corruption scandals, an increasingly ineffective prime minister and rebellious allies," noted the Los Angeles Times.

If the whole thing hadn't ended in disaster, the move could have signaled the government after years of dithering, is serious about attracting overseas funds. Now it is hard to find any money manager with short-term conviction on Indian equities. China and Russia outperformed the benchmark MSCI Emerging Markets index, but India sank with the Bombay bourse showing how bad it insists on being this year by falling over 10 percent in November. The Sensex has lost more than a third of its value in dollar terms this year and now has the dubious distinction of being Asia's worst performing stock exchange.

UBS hosted a conference call about India on 29 November, which it announced to clients with an email headlined "India explodes".

"Suddenly everything seems to be coming to a head in India. Growth is disappearing, the rupee is in disarray, and inflation is stuck at near-record levels. Investor sentiment has gone from cautious to outright scared," UBS wrote.

Finance Minister Pranab Mukherjee is targeting a deficit of 4.6 percent for this fiscal year, but on Wednesday he conceded slowing growth and a rising subsidy bill would widen India's fiscal deficit. The Nomura Asia Pacific Outlook 2012, released last week, expects the fiscal deficit to climb to 5.1 percent in 2012.

"A slowing economy, soaring inflation, policy paralysis on the part of the Indian government, and growing pessimism about what the future may bring have converged to create what is becoming a downward spiral," Daniel Wagner, CEO of Country Risk Solutions, a cross-border risk management consulting firm, wrote in The Huffington Post.

Will the government be able to reverse India's descent? "Judging from prior experience, the answer appears to be 'no', as the Indian government does not have a good record at 'swiftly' changing much of anything," added Wagner.

by Uttara Choudhury

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