Policy Focus Should be on FDI.

The government's move to allow foreign retail investors to invest directly in equities is welcome, but only an incremental step to shore up capital inflows. Already, qualified financial investors ( QFI) including individuals, pension funds and trusts are allowed to invest up to $10 billion a year in the stock market through mutual funds instead of having to come through foreign institutional investors. So, allowing QFIs to directly own Indian stocks - each of them can own up to 5% in an Indian company but their cumulative investment is capped at 10% - is an incremental step.

It will open up another avenue for portfolio investment inflow, but does not guarantee such flows. Excessive dependence on foreign fund inflows only makes the stock market more volatile. Ideally, the government should encourage long-term domestic savings into the equities market. An institutional mechanism is already in place, with the National Pension System (NPS) that allows subscribers to invest in equities and generates superior returns. Workers should be allowed to voluntarily migrate to the NPS from the Employees Provident Fund Organisation (EPFO) that does not invest in stocks.

Two, the government should also enhance foreign direct investment rather than FII investment . It should resume talks with its allies and the Opposition to forge a consensus on FDI in retail and insurance. Last year, FII outflows were the highest from India compared to BRICs and emerging markets. According to EPFR Global that tracks foreign fund flows across markets , FIIs withdrew over $4 billion from India in 2011, against an inflow of $1.35 billion in 2010. Our stock markets have also been among the worst performers, with the BSE Sensex shedding close to 25% in 2011. However, market forecast will look up as the economy is expected to grow by 8-9 % in the medium to long term. So, easing curbs on investment makes sense. It should be backed up with sound macroeconomic management to restore confidence among foreign investors and also ensure that their returns are not eroded by a falling rupee. Reforms brook no delay, to contain and prioritise spending.

Source : economictimes.indiatimes.com