Why Foreign Direct Investments (FDI) are important for India

It is really good to see that investors are keeping a close eye on valuations rather than being in a buying frenzy, with advice from brokers and pink papers. However, it is important to put India's economic fundamentals and valuations in perspective. For only then can you fairly assess whether Indian markets are too expensive for a global investor looking at emerging markets.

Let us look at the inward flow of foreign direct investment (FDI). For a developing economy like India sustained inflow of FDI is extremely critical to achieve high growth rate. Investment from the government and private sector need the boost of foreign capital and intellectual know how so as to help GDP growth rate reach the inflection point. Take the case of China in the early 1990s, that was the time when China started investing heavily in its infrastructure and industries. And it relied that much more on FDI. The fact that the economy put in reforms and incentives to attract foreign capital helped it sustain strong FDI inflows for nearly two decades.

India today looks strikingly similar to China in early 1990s. Assuming that India is to embark on a similar investment phase in both infrastructure and industries attracting such FDI is inevitable. Not only will it reduce the pressure on the banks and financial institutions for long term funding, but it will also allow companies to focus on their growth plans rather than constantly worry about funding requirements.

The fact that initiatives by the government to bridge deficits and attract foreign capital will also enhance India's sovereign rating will be yet another positive. In fact the S&P has already upgraded India's rating from negative to stable. Going forward such rating upgrades will up India's appeal on the FDI radar.

Thus there are enough reasons why India's growth rate in the the coming decade could look far more appealing than that of other emerging markets and going by the key signs of the Mega-trend that India could be witnessing, several companies here could offer more attractive investment opportunities than in any other markets.

Also,the concept of focusing on attracting FDI in the Nation has a very important impact on the Rupee,which I will discuss in my subsequent article which will be posted soon.