Foreign Investments in an Economy 1

Disclaimer: This post purely represents my personal Thoughts only and nobody else’s.

Most people when asked what is needed for a country to grow will say Foreign Investment flows into the country are vital to the growth and the pace of growth of the country.

Now, I don’t challenge the conception/theory, but I differ in what type of Foreign Investments are need for a country to grow or rather develop.

I will classify the foreign investments into a country as – FIIs & FDIs.
The former are investment companies that purely look to making Financial Gains by investing in the country’s stock markets.
The later invest in companies and look to grow their investments with the companies and thus profit from it.

In India, we seem to encourage FIIs more than FDIs. Everybody is hooked up to the Stock Market Mania. (Disclaimer here – I myself am an aggressive investor in the Equity Markets). People say we should allow more FII money into the Stock Market, we should remove any sort of restriction that is currently there for the FIIs to invest more.

My take on this, what does the country get out of it? Other than a small set of people – investment bankers, brokers and others related to the stock market, No body else gains anything out of it. The companies in who’s stocks the FIIs invest do not gain from it. Argument is when FII invest more, valuations of scripts go up and thus they benefit all other investors (read: retail investors). But as we have seen in the past few months, Retail Investors have lost more money than they gained in the bull run when FIIs pulled out and markets crashed. Here only the FIIs seem to gain, esp. when they use short-selling and virtually kill the market for others.
While Retail Investors have to pay taxes on the profits made by them in the market, FIIs don’t need to pay a paisa. Unfair practice against the common man in the country.

On the other hand, FDI investment goes directly into the company. This helps in creating infrastructure, build factories and inturn generate employment for the masses in this country.  This is more important for the country to grow and sustain itself, not the growth in Stock Markets.

But our policy makers seem to think otherwise. Investment in Stock Markets are encouraged more than into the real economy. Surprising this from a Government came to power on the basis of doing things for the Aam aadmi (common man).

NOTE: In India, FDIs seem to have lock-in period, but FIIs don’t seem to have any, so they are more like the fly-by-night operators who just look for quick gains. Can we have a policy which ensures FIIs don’t just come and go with their huge amounts of money and create more uncertainity. (Today the stock market indices barometer is so strongly entrenched into the minds of the masses as an indicator of the economy that it creates uncertainity with the kind of fluctuations we have been seeing in the last 18-20Months.

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One comment on “Foreign Investments in an Economy

  1. Allen Taylor Nov 12,2008 12:30

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

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