Foreign money pumping up Indian firms - A governance insight

The speed at which foreign funding is arriving in India is changing the market dynamics.

Foreign money pumping up Indian firms - A governance insight

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• Fire fire everywhere: The Indian start-up scene is on fire, with new unicorns emerging weekly! Zomato IPO's success is another milestone that created exit opportunities for early investors. Several billion dollars are being raised easily by startups now.
• What happens to the money: Most of it is spent or burnt, to hire people, build infrastructure, strength core technology, build the brand and create demand. The money is equity, as unicorns don't go for debt.

1. In 2021, perhaps $40 b will be raised, which is Rs.3 lakh crores or 2% of India's GDP
2. Foreign funds are pumping such huge sums, and this is actually the stimulus that everyone was asking from the government
3. It is a stimulus, as it is not debt, and is coming into our economy directly
4. The money will be spent in India, so whether someone makes money or loses, is of secondary concern

• It's the start: This is not a fluke and if India plays its cards well, then the capital flow will continue for a long time. Investors always look for growth and innovation, and recent events in China have shaken everyone's faith. But India has to avoid big mistakes.
• Some problems:

1. Pricing of issues - In the first round of IPOs, the valuations are quite high. So some will ultimately fail, and regulators should not lose patience or hope
2. Sudden changes in regulations may make monetisation tough, or firms will move abroad, nothing helping our economy truly
3. There is a clear lack of level playing field, and common perception is that domestic lobbies can manage regulatory environment easily; foreign firms will be dissuaded hugely by it, so end this perception

• Post Covid growth: The bulls think a general GDP growth rate of 7% per annum will be the norm, while the bears think it'd be around 4-5 per cent. Today's stock markets are moving along with the bulls. Why?

1. The money being raised by startups is supercharging growth, and IT/Tech industry is witnessing huge demand for talent. There will be a big growth multiplier coming from here, for other sectors like housing, consumption etc. This was missing since 2017
2. There is a trend of high value added manufacturing shifting to India. The PLI scheme is pulling more of it, and the China+1 strategy of MNCs is helping too. In API, precision manufacturing, specialty chemicals, textiles, the trend is visible. Global demand is strong and buyers want long-term contracts
3. Housing sector is witnessing rising demand, and coming years will see more consturction happening (a change from many years). It will help clear the NPAs, and build a multiplier down the line

• Summary: This time, it really looks like India will enter a breakout phase.
• EXAM QUESTIONS: (1) What is better for India's growth plans - domestic capital or foreign capital? Explain with logic. (2) The sudden burst of investment in Indian companies is a signal of renewed optimism in economic future of India. Analyse with examples. (3) The startups of India may prove to be the saving grace for a stuttering economy. Do you agree? Explain why, and how.

Read more on - Polity | Economy | Schemes | S&T | Environment

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