Technical Analysis

Reforms boost equity market

Rajesh Kothari | Updated on October 13, 2012 Published on October 13, 2012

In the last 30 days, the Union Government has taken several steps to revive foreign players interest in the Indian market. Notable among them are allowing foreign airlines to buy up to 49 per cent in local airline companies, FDI up to 51 per cent in multi-brand retail (currently, foreign investors can hold up to 24 per cent, but no FDI allowed, hike in FDI limit for all TV distribution platforms from 49 per cent to 74 per cent and hiking FDI limit to 49 per cent in insurance and pension sectors (subject to approval by Parliament).

The stock market already cheered the Government steps and gained 9 per cent in just one month. Strong FII inflows in this period reflects foreign investors’ sentiments and reaction to such bold decisions. It is not just FDI news which makes investors positive but it is the Government’s approach to announce these steps despite the fractured political system which makes investors bullish.

FDI is critical for India to achieve 8%+ growth because FDI opens a wide spectrum of opportunities for industry Products of superior quality are manufactured by various industries in India due to greater FDI participation.

Inward FDI has the potential for job creation and employment, which is often followed by higher wages. Resource transfer, in terms of capital and technical knowledge, is also a key motivator that encourages inward FDI. If India chooses not to attract FDI then there is a possibility of slower growth of about 5-6 per cent.

The change in FDI norms will surely bring a lot of relief to the sectors. Airline companies, for instance, are in poor state of health with huge accumulated losses and debt on their balance sheets. While Kingfishers Airlines is on the verge of bankruptcy, Jet Airlines has reported significant erosion in its net worth in the last few years.

FDI in multi-brand retail will attract a lot of new multinational players into the Indian market. India has emerged as the fifth most favourable destination for international retailers, outpacing the UAE, Russia, Indonesia and Saudi Arabia, according to A T Kearney’s Global Retail Development Index 2012. According to A T Kearney, India remains a high potential market with a growth of 15-20 per cent expected over the next five years.

Allowing higher limit of FDI in TV distribution platforms will make capital available for digitisation.

A research paper titled FDI and Stock market development: Compliment or Substitutes?after analysing market capitalisation and economic activity for 77 countries, concludes that more FDI is positively correlated with market capitalisation and economic activity.

Higher FDI and better fundamentals lead to an increase in domestic stock market activity, more and more of this activity will occur abroad as better fundamentals also spur the degree of migration in capital raising, listing and trading.

Investment climate in India has suffered a serious setback during the last 18 months. Both domestic and international players have either stalled CapEx programmes or are delaying their decisions. The recent FDI norms announced by the Government are a step in right direction. It shows the Governmnet’s willingness to open the doors for foreign players and it also demonstrates its seriousness in reviving the confidence of global and local industrialists.

(The author is MD, AlfAccurate Advisors. The views are personal)

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