Do FIIs really matter?

The Indian economy was primarily agrarian with more than 70 per cent of the GDP growth coming from the agricultural sector three decades ago.

But in the last 10-15 years, the Government has been shifting its economic growth focus to the manufacturing and services sectors. Both these sectors required capital for fresh investment.

Since domestic savings were not sufficient to cater to the needs of private investments and to help the economy grow at 10 per cent, India became dependent on foreign capital.

Big numbers Much of this inflow came through the foreign institutional investor route. Purchases of Indian stocks by the FIIs helped finance the capacity-building and expansion of Indian companies.

If we look at the flow of capital from FIIs into our capital markets since 2004, the numbers are quite significant.

It is worth noting that except for 2008 and 2011, FIIs have been net investors in almost all the years in the Indian stock markets. They have been investing significantly using the P-Note route as well.

Apart from direct investment in equities, we have seen them investing using the FDI and debt routes as well.

They have invested in almost all sectors and their favourite companies have been HDFC, HDFC Bank, ICICI Bank, Axis Bank, Grasim, Power Grid, NTPC, Infosys, TCS, IDFC, LIC Housing Finance, Havells, SKS Microfinance, Lupin, Sun Pharma, Tata Motor, ACC, to name a few.

This shows their participation and capital contribution to leading companies across sectors. They have undoubtedly contributed to the growth of our economy taking equity risk.

However, the data establishes that our capital markets have become highly dependent on external capital. What is the reason for this? Financial savings in India have fallen to 26 per cent from a peak of 36 per cent of GDP in 2007. Persistent inflation is responsible for this and it has made a big dent in the disposable income of households.

There is another very interesting reason for this. The present Government, for the last five-seven years, has continuously increased purchase of food grains through the Food Corporation of India and has also hiked the Minimum Support Price (MSP) for various crops.

The MSP for many crops has been increased by more than 100 per cent . The impact is that terms of trade have shifted to the agricultural sector, increasing income in the hands of the rural population.

Rural people have a tendency to save in physical assets such as land, real estate, gold and silver. So, there is less money being diverted into financial savings. Effective remedies

One of the only effective remedies to reduce our dependence on FII capital is to have our own capital.

On the policy front, we need immediate and significant action in the form of tax sops to Indian households to save more.

Once we have higher financial savings, a good part of it would flow into the capital markets.

The writer is Co-Head Institutional Equities, Emkay Global Financial Services Ltd

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