Is India Wooing the Wrong Dollar-surplus Segments?

India needs foreign exchange. The country’s oil import bill was US$15.6 billion in January 2013. Total imports were US$45.6 billion and exports were a much lower US$25.6 billion, leaving a monthly trade deficit of US$20 billion. Projections for the full year (2012-2013) put the deficit at US$200 billion, up from US$185 billion last year. “This is unsustainable,” says D.S. Rawat, secretary general of India’s apex chamber of commerce, Assocham.

The government can’t do much about the petro-goods import without crippling the economy. And leaders seem to be unable to do much about gold imports — the second biggest item in the import basket. In calendar 2012, India imported more than US$40 billion in gold. Recent increases in import duty are not likely to help given the practically insatiable Indian demand for the yellow metal. According to the World Gold Council, India will import 965 tons of gold in 2013 compared to 864.2 tons in 2012.

There was a time when India lived on loans and aid; the 1991 crisis that ushered in economic reforms and liberalization saw foreign exchange reserves come down to US$1.2 billion in January of that year. (Reserves stand at around US$300 billion currently.) Today, India is among the fastest-growing economies in the world and can’t rely on foreign largesse.

How will the government balance the books? Experts say a strong first step would be to create an atmosphere conducive to physical exports and invisibles like information technology (IT). But this takes time. So, as a short-term measure, they say, the nation must embark upon wooing the world.

Wooing Foreign Investors

Early this year, Indian Finance Minister P. Chidambaram was hard-selling the India story to foreign investors in Hong Kong, Singapore, Frankfurt and London. “FIIs [foreign institutional investors] are betting big on the India growth story,” he said while in London. “FDI [foreign direct investment] inflows will also improve.”

Chidambaram has ushered in a new wave of reforms and some of the anti-FDI moves of his predecessor — and now president Pranab Mukherjee — have been watered down. But multinationals including Vodafone, Nokia and Shell are currently immersed in tax disputes with the Indian government. So the jury is still out on whether the climate for foreign investment has changed that radically in India.

The numbers reveal that the India growth story cannot be ignored by companies facing stagnant markets at home. Even in a bad year — GDP growth is expected to slip to 5% in 2012-2013 — there are opportunities. “FIIs pumped in more than US$24 billion into Indian equities in 2012,” notes Dhruva Raj Chatterji, senior research analyst at Morningstar India. This is the second highest FII inflow in any calendar year into the Indian stock markets. The highest FII inflow was US$29.35 billion in 2010. In 2011, there was actually an outflow of US$0.36 billion.

Given the calamitous 2011, the last year was obviously good news for the Indian markets. “The key takeaway is that India was an indirect beneficiary of global liquidity and sentiment in 2012, which led to large inflows into riskier asset classes like emerging market funds and exchange traded funds during the year,” says Chatterji. FIIs have been blowing hot and cold with India. In 2007 and 2009, there were inflows of US$17.65 billion and US$17.47 billion. In 2008, there was an outflow of US$11.97 billion. “FII inflows have been volatile and fickle over the years,” adds Chatterji.

Chidambaram is aware of that. His real target during the overseas visits was FDI money. If companies are investing in plants and machinery, it is not so easy to pull out if things go wrong. FDI, by its very nature, is there for the long haul.

And FDI is the real worry, experts say. In November 2012, FDI inflows into India declined to a two-year low of US$1.05 billion. In the equivalent month of 2011, it had been US$2.53 billion. Aggregates also show no clear trend. Total inflows were US$36.50 billion in 2011-2012 against US$19.42 billion in 2010-2011 and US$25.83 billion in 2009-2010. “FDI and FII inflows are very unstable as they are highly dependent on investor sentiment, capital market performance, the country’s growth, political stability and the value of the currency, among other factors,” notes Bundeep Singh Rangar, chairman and founder of IndusView, which advises multinational companies on business opportunities in India.

India Tops in Remittances, But…

Yet even as Chidambaram was talking to potential investors in foreign cities, Prime Minister Manmohan Singh and President Mukherjee were playing host to a much larger party at Kochi, in the southern Indian state of Kerala. This was the 13th meeting of the Pravasi Bharatiya Divas (PBD).

Translated as non-resident Indian (NRI) day, the PBD takes place every year in January. It is a recently-discovered opportunity to celebrate — but it wasn’t exactly a resounding success, observers say. NRIs come in too many hues to have much in common. There are Indians who have been abroad for centuries (and are classified as people of Indian origin — or PIOs). Others may have gone to the Gulf as migrant labor only a few months ago. The green card holder from the U.S. likely can’t even talk in the same language as the mason from Madurai: India has 21 official languages and several thousand dialects.

Yet Finance Minister Chidambaram could probably have made a better pitch in this case, experts say. FIIs are whimsical — fund managers tend to rush in and out to wherever in the world they see the chance of making profits. FDI, however, always wants its pound of flesh: if a company is putting one billion dollars into a soda factory, it will make sure local competitors do not receive undue favors from the government. NRI money doesn’t come with such strings attached. “Remittances to India are expected to cross US$70 billion in 2012,” notes Rangar. “They have been more stable and consistent and have been growing steadily.”

According to the World Bank’s Migration and Development Brief, officially recorded remittances to developing countries are expected to reach US$406 billion in 2012, up by 6.5% from US$381 billion in 2011. The next year will see a further jump of 8%. “The size of remittance flows to developing countries is now more than three times that of official development assistance,” the brief continues. The World Bank reports that India is the top recipient followed by China (US$66 billion), the Philippines (US$24 billion), Mexico (US$24 billion) and Nigeria (US$21 billion).

FDI and FII money will together account for some US$40 billion at best this year against remittances of US$70 billion. So shouldn’t there have been a grander reception at Kochi, much more hoopla, and investment advisors with a cadre of options for such money? But Chidambaram wasn’t there, and Y.A. Rahim, president of the Indian Association of Sharjah, says he won’t be there next year. “It was a waste of time,” he notes.

“There are three clear segments of NRIs,” adds Ashvin Parekh, partner-national leader of global financial services at accounting and consulting firm Ernst & Young. “First, those who work in environments where they will never get a resident visa, like in West Asia or in difficult environments like Kazakhstan. They have no option but to send their money back to India. Second are people who may migrate, but are in specific jobs or roles like the area of technology. These people typically have short-term job and income opportunities. This segment also doesn’t have too much of a choice. The third segment comprises individuals who run their own businesses. Many of them first moved to Africa and then they and their families moved to the U.K., Canada, the U.S…. They possess substantial wealth and, importantly, have the option of not sending it back to India.”

A Neglected Segment

According to Parekh, “The Indian government has conveniently ignored the first two segments because they don’t have a choice. But it also has not focused on the third segment because of sheer lack of any thinking or planning. We are so engrossed in micro-politics that there is no proper plan or approach toward attracting any kind of foreign inflows. If there was any thinking, I am very sure we would have had proper instruments for all the three segments of NRIs.”

“I’ve been saying for the past decade that this is an area that needs focus,” adds Jayati Ghosh, professor of economics at the Jawaharlal Nehru University in New Delhi. “Most of the remittances in the past, especially in the 1990s, came from workers in the Gulf and West Asia. Since the 2000s, 50% has come from the U.S. When they come back, they get the money back in the form of a remittance. So at present there are two slightly different things at play.

He notes that one argument for why the government has ignored the Gulf money is a class factor. “These are workers of lesser skills,” Ghosh notes. “They are semi-skilled and unskilled workers, including women who go as domestic maids and nurses. The government is really not bothered. Because these countries allow only limited tenure, remittances continue to be stable.”

It’s not all about altruism for the NRIs who have a choice: “Here’s the underlying reason: The average key lending rates of central banks in the U.S., the U.K. and the European Union were 0.61% in 2012, the same in 2011 and 0.58% in 2010,” Rangar says. “In comparison, the Reserve Bank of India offered 8% in 2012, 8.25% in 2011 and 6.25% in 2010. This means that the arbitrage in interest rates kept increasing over the years. It went up from 4.36% in 2008, to 5.67% in 2010 and topped 7.39% in 2012.”

To be fair to the government, however, it is much easier to tap someone like London-based L.N. Mittal, who is 21st on the Forbes global billionaires list, than to separately reach 1,000 cooks. The cooks, carpenters and casual workers were there in Kochi. They were largely people on holiday attending the PBD to find some entertainment. (According to official figures, the Indian diaspora across the world is around 25 million with 1.8 million in Saudi Arabia alone.)

Need for Innovative Thinking

But when dealing with the masses, there are other ways to make people more welcome and investment more attractive, experts note. Parekh suggests changes in the tax environment. “We can look at having tax avoidance treaties with those countries that have a large population of NRIs,” he says. “What could scare all three segments is this talk of taxing the rich and inheritance tax.” (Chidambaram has started a discussion on the introduction of estate duty, which was removed some two decades ago.)

Ghosh adds that payment mechanisms should be improved. “In Kenya and other countries, they are experimenting with mobile telephony as a way of transferring money,” she says. “We should definitely improve the technology and reduce the red tape for the people at home to collect the money. We should also think of innovative ways of channeling these remittances toward infrastructure and similar activities that would benefit the local communities rather than simply consumption.”

For Rangar, it’s about leadership going back on the road. “There is no one online distribution platform to sell investment products, such as an India sovereign bond, to NRIs,” he notes. “That means that road-shows are required with select NRI audiences, which are time-consuming and require political will and execution. But it would certainly produce more results and stickiness than trying to attract skeptical foreign investors whose capital can be fleeting in times when foreign funds are most needed.”

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