Saturday, February 05, 2005

India: Money Magnet

Investment in India is becoming very popular. Foreign direct investment alone will likely reach US$15 billion this year, almost tripling from last year. That would put India among the world's top recipients of FDI, although nowhere near China's level.

The FDI is a sign that foreigners are quite pleased with India's economic management, and more importantly of the continued deregulation that is going on. For example, the Indian government just raised the limit on foreign participation in the telecommunications sector.

The IMF has just signed off on most of India's economic policies, noting that:
Financial market confidence in India remains strong. After posting one of the highest returns among emerging markets in 2003/04 (83 percent), the stock market experienced a short period of turbulence at the start of the fiscal year, reflecting election-related uncertainty and expectations of interest rate tightening in the United States. However, buoyed by renewed foreign investor inflows, the stock market more than regained the ground lost, rising by close to 30 percent between June and mid-January.
The IMF also praised India's fiscal management, sort of...
The deterioration in central government finances appears to have been reversed. For the first time since the mid-1990s, the central government deficit (IMF definition) came in below target in 2003/04 at 5.1 percent of GDP reflecting strong revenues and economic growth.
That said, it did note that India's fiscal situation is the biggest concern to growth. India's consolidated fiscal deficits have been around 10% of GDP for almost a decade now, and
Directors emphasized that India's large fiscal deficits and public debt remain a key constraint on sustained rapid growth. Directors noted that, with credit to the private sector on the rise, the government's large financing needs can increasingly crowd out private investment. Moreover, they underlined that, without enhancing tax revenues and reducing lower-priority spending, it will be very difficult to adequately address India's large infrastructure needs.
Not to be outdone, ratings agencies are joining the fray, starting a race to see who can upgrade India the most in the least amount of time.


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