In a world where economic journalism is dominated by headlines a significant development was relegated to the fine print. Last week the Financial Times reported that India, in 2015, with $63 billion of Foreign Direct Investment (FDI) had taken the top rank in the list of countries in terms of greenfield capital investment. After trailing behind China for a long period, India had raced past its formidable rival in terms of attracting long-term global capital. In 2015, India was a the destination of choice for global investors.
This is a cause célèbre. Theorists may argue that this is a one-eyed wonder for they have the luxury of not having to live with the consequences. However, as an investor, I hold a different view. I see this data as a strong validation of the Indian story and a regained faith in its potential. Unlike the shouting brigade of experts, investors put their money where their mouths are. The fact that investors are feeling confident enough to put their monies in India (a 44% increase over last year and 13% over China) means that they are seeing things that our armchair experts may be missing.
I concede, investors can be wrong as they have been on India in the past. Whether the India of today is different from the one of the past will only unfold itself in the future. However, numbers do not lie. The fact that investments have increased in such a large quantum within a short time cannot be denied. So, what is changing around us that is causing a resurgence of confidence in India?
First, India’s credibility and global standing in the last two years has moved up many notches and is on an upward trajectory. India is again seen as a deep and big market with nascent capabilities but great potential. It is a stable and safe place to invest with reasonable enforcement of law. In a return constrainted world, where emerging markets like India are vital, this is indeed an exception. The strong and development-oriented leadership of Prime Minister Narendra Modi has rebranded India. He is seen to work relentlessly on removing the bottlenecks that hold India back. His consistent projection of India’s strengths and potential has started to reverberate with global investors. They may not fully understand his vision yet, but they have started to increasingly trust him with their money. Those of us who know the power of momentum in investing realise that this dribble could become a deluge if Modi can keep up his passion for marketing India and delivering on his promise. Experts who had mocked his foreign trips may want to reconsider the wisdom of their approach in the light of mounting evidence that his outreach is working.
Second, corruption in the higher echelons of the government has substantially reduced. For the first time, one gets the impression that Delhi is working for India and its people and not for crony capitalists and vested interests. This is no mean achievement for a polity beleaguered by this malaise for decades. It is clear that on governance India under Modi wants to move to the other side of the crimson line and join the small club of greatly governed nations. The visibly intense national desire combined with a vibrant democracy and a robust legal system means that sooner or later India will get there. History has shown that when these reforms reach a critical mass they generate their own life making constraining structures and systems less relevant. Efforts to move the national narrative in the direction of an efficient and honest State has made the investing community sit up and notice. With fundamental changes underway, the Indian story starts to become worthwhile for the long-term investor.
Third, one can see a serious effort to invest in the capacity and capability augmentation of both India and Indians. This is a long awaited transition from an India of entitlement to an India of empowerment. Financial inclusion schemes, enhanced allocation to the agri sector, ambitious programmes like Make in India and infrastructure reforms are among the many initiatives that point towards building of both hard and soft capabilities. This makes India attractive to the investors as most of them know that sustainable returns are built on growing capacities and not on short-term arbitrages. If a billion plus Indians are empowered to be economic growth engines human prosperity is compounded multiple times.
Finally, the government is withdrawing from business in a systematic way, thereby creating space for business to occupy. The message from the government is that business will operate in India within well defined rules that the government will enforce. The mindset of using rules as a mechanism of harassment and rent seeking is slowly changing. That is a reassuring development for investors. As the government refocuses its priorities to social welfare and development, while allowing the private sector to be the engine of growth, a new synergistic public-private alignment is starting to emerge. This, fostered by a strong leadership, has started to work its charm on the investor community. If sustained, nurtured and allowed to manifest in day to day executive actions it could fundamentally alter the capital balance vis-à-vis China.
To sustain this momentum substantial gaps still need to be addressed. Government capabilities, particularly state governments’, are still quite low. Local administration continues to be, by and large, anti-business. The judicial system and timely enforcement of contracts remains a structural bottleneck. Emergence of commercial courts and simpler and fewer laws have now become a necessity. Finally, reliable infrastructure is a constraint that India will need to address if it seeks to solve its employment challenge through a quantum leap in both manufacturing and services.
Long-term investors have been around long enough to know the power of fundamentals. Modi’s attractiveness lies in his continued commitment to alter India’s economic architecture. His dogged work to improve things inch by inch established his Gujarat credentials. The same determination and focus seems to be at work in Delhi. While theorists may debate and discuss one-eyed wonders the investor knows what to do in such a fast changing order. India’s investment story may just be starting.
Shaurya Doval is director, India Foundation and managing director, Zeus Caps
The views expressed are personal