International markets are in a state of flux. India is poised to be the beacon calling investors to stability. But, whether they come calling will depend on India's success in ease of doing business, opening up sectors to foreign funds, and tax reforms, among other factors.

In turbulent times at sea when the waves are rough and there is no clear way ahead, often it is just a lighthouse that provides the only spotlight that you can follow to safety. At a time when global markets are in turmoil, commodity markets in the doldrums, and peer nations like China and Indonesia facing internal economic issues, India with its over 7.5% GDP growth has emerged as the proverbial lighthouse for global investors.

INVESTOR SWEET SPOT

However, it is not just merely growth numbers that are making India a global darling for investors. A stable government, the commitment to maintaining its glide path for a lower fiscal deficit, current account deficit under control despite gradual rupee depreciation, the strong regulatory and monetary policy actions taken by the Reserve Bank of India, and steady steps taken to spur growth are all helping India achieve its true growth potential. The Union Budget and the recent steps take on power entities, stalled projects, and roads and highways, and have ensured that India, which has always been handicapped on infrastructure, will now be able to tide over this issue, enabling it to not lose pace in its growth trajectory. Such quality planned expenditure spend by the government; along with a favourable monetary policy environment, makes it the most attractive emerging market economy, when other BRICS nations find themselves facing huge challenges.

CHALLENGED MARKETS

The recent issues in China and the panicky steps being taken by the regulators, including their central bank, are now leading investors to back off from their earlier unbridled optimism on China's prospects. Another competing investment destination is Philippines, but the slow progress on tackling infrastructure bottlenecks and lack of clarity on various sectors - for e.g. solar, are a deterrent for global investors. Additionally, with liquidity ample from large domestic sources, there is limited space for foreign money flow to make headway in key deals. With presidential elections coming up in May, investors do not see much progress in this geography in this calendar year. Malaysia, has taken a drubbing due to its status as a key exporter of oil and gas resources, and the sharp slump in energy markets. The depreciation of the Ringitt has only compounded problems further for overseas players looking at any opportunities. At the same time, while Thailand is expected to stag a growth bounce back following a prolonged period of political unrest, the immediate growth is expected to stay tepid and that is likely to keep investors away till stability emerges. The most developed market in the region - Japan, which just sold negative yield 10-year bonds for the first time, show the huge challenges faced by the government to spur investment there. Structural issues such as lack of reform initiation in Indonesia post elections, too much regulatory churn, and debt issues for large corporates has ensured that the sheen on this former darling for investors is slowing fading away.

STANDING TALL

The energy slump has hurt Russia, Brazil's economy is in disarray, China is facing growth pains and struggling to rein back on its infrastructure spend, while South Africa is faced with domestic fiscal problems that are similar to Brazil. The BRICS are falling apart and only the 'I' stands tall in the middle of this mess. And India finds itself in an enviable position where global money is looking to enter the country through debt and equity - foreign portfolio investors, foreign institutional investments and through foreign direct investments. India has emerged as the biggest beneficiary of the sharp fall in crude oil prices to sub-$35 a barrel levels, with the government using the space created to fix the fiscal deficit, increase taxes, and also bolster its foreign exchange reserves. With all that's playing in its favour externally and domestically, India's former image as an economic under performer has undergone a dramatic transition and it is now seen as the world's fastest growing large economy.

WORK TO BE DONE

But, as the focus of the Union Budget for 2016-17 (Apr-Mar) on rural India shows, there is a lot of work yet to be done to bring the whole economy at par and ensure self-sufficiency on farm production. Many of the steps announced - such as greater support for the rural job programme, drought support, and digitisation of land records - will help improve the rural sector in a way that strengthens overall economic prospects. Even Aadhaar, which is a unique identification code that already exists, will get integrated into the system through a legal framework, making it the backbone of future economic reforms.

However, important bills that are pending in the Parliament, including the Goods and Services Tax and Bankruptcy Code, remain a cause for concern. The GST Bill that could transform taxation in the country has been hanging fire due to disruptions in Parliament, raising worries about whether reforms will be stalled by politics. The scrapping of the Land Acquisition Bill also has spurred concerns in the minds of global investors on the passage of crucial bills.

ROAD AHEAD

While India continues to grow robustly, the weakness in the rupee against the dollar, even as it strengthens against other currencies, is an area investors will have to be wary of because such volatile currency often deters investments or erodes their profits. However, nearly by default, India is also the most open large economy with the best growth potential in the foreseeable future and this makes it a sweet spot in these bitter times. Whether investors flock to India, will also depend on India's success in ease of doing business, opening up of more sectors to foreign funds, and tax reforms, which will make it more business-friendly for global investors. It is India's time to capitalize on this opportunity and make the most of it.

As shared with IFIN Panorama Editorial Team


















IL&FS Global Financial Services, Pte Ltd. - Singapore




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