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All gain, no pain for now

The Sensex is on a roll, but this can’t be on the basis of foreign investors alone.

india Updated: Sep 23, 2010 23:29 IST

Few events capture the new resilient Hindu rate of growth as dramatically as the Sensex crossing 20,000. Leaving most of the world behind, it has taken just 32 months for Indian stocks to reclaim the peak they had run up to before the Great Crash. This is on expected lines: India was among the first major economies to shrug off the credit crisis, the subsequent stock market rally is a celebration of this remarkable feat. The $20-odd billion that have flown into Indian stocks between January 2008 and September 2010 symbolise a world seeking reassurance that demand for goods and services has not disappeared altogether. Global capital is seeking out all such islands of discernible demand, and nowhere is it as visible as Indians buying cars and consumer goods, the triggers for the latest Sensex surge. The money will disperse as more islands come into view, till then Indian stocks will continue to sizzle.

If demand is what the world needs and India can provide a stable slice of it, the dollar tide in our stock market serves as a scout for later investment in productive capacities. The post-crisis portfolio flow could be the precursor of a bigger wave of foreign direct investment into India. There is, however, a big difference between letting your money ride on companies doing business in India and doing business here yourself. Bountiful returns are available to companies like the Asian car makers that have learnt to operate within the substantially lower price points of the Indian market. This requires a reworking of business processes that, say, a European car maker might find downright frugal. Those who make the cut can, and do, use their India experience to prise open newer markets.

Indians last year saved close to $400 billion and put a fraction of that into the stocks the rest of the world is chasing. The valuations that emerge from an extra $20 billion in our bourses are too rich for the Indian investor — he pulled $2-billion out of mutual funds as more foreign money kept coming in. Real estate and gold, traditional investment avenues in the subcontinent and less vulnerable to sudden capital flight, are at lifetime highs. This rent-seeking inherent in the Indian approach to investment needs to be curbed. The much-touted domestic demand is a function more of India’s population than of rapid affluence. One reason being our predilection for unproductive investment. Every time the stock market scales a new peak we need to ask ourselves why more of our savings are not financial. If the underlying economy is on a firm footing, the gains from the stock market should not be left to foreign institutional investors alone.

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