Capital control: As RBI shuts door, more investors may flee India

New York: Foreign investors seem to be increasingly wary about investing in India as the Reserve Bank of India battles to stem the rupee's plunge and stop capital outflows that are pushing India toward its biggest crisis in more than two decades.

On Wednesday, RBI Governor Duvvuri Subbarao tightened rules on overseas investments to prop up the rupee. He cut the amount Indian companies can invest overseas without seeking approval to 100 percent of their net worth, from 400 percent. The move is expected to scuttle plans the Aditya Birla Group, Apollo Tyres and Cipla had to invest abroad. Indians can only remit $75,000 a year versus the previous $200,000 limit.

"It's fire-fighting to save the rupee, but where does it leave my investments if the Indian government suddenly introduces new controls in the future that restrict me from repatriating my profits," said Boston-based medical equipment manufacturer Harvey Kirpatrick.

"It really gives me pause. It's worrying because the move reverses the relatively long-term trend of easing capital controls."

For the first time since mid-2007, the advanced economies of Japan, the US and Europe are contributing more to growth in the $74 trillion global economy than the BRIC economies of China, India, Brazil, and Russia, according to Bridgewater Associates, which manages $120 billion in global investments.

"With the US economy on the rebound and flat growth in emerging markets, Western firms expect better returns back home," Amrish Shah, who advises clients on mergers and acquisitions at Ernst & Young, told The Wall Street Journal.

India's economic mismanagement and lack of growth have driven Western firms to sell their Indian investments. The falling rupee, which has remained weak despite a raft of measures by the RBI, has further eroded the profitability of many investments foreign firms have in India, expediting the departures.

"Investors fear that the rupee will continue to weaken, pulling unprofitable investments further into the red and leading to higher mark-to-market losses," noted the Journal.

India's gaping current account deficit has put a grinding pressure on the rupee which hit a record low of 61.80 against the dollar last week. It has fallen 31 percent in the past five years and 12 percent in the last six months against the dollar.

US insurer Berkshire Hathaway has decided to close its business selling online insurance in India two years after it was launched. Aviva PLC and New York Life Insurance Co. are also among insurers that are selling or have sold their India franchises. Royal Bank of Scotland also said on Friday that it would sell some of its Indian assets to a local bank.

 Capital control: As RBI shuts door, more investors may flee India

Berkshire Hathaway CEO Warren Buffett.

In July, foreign investors like US retail giant Wal-Mart, and steel companies Posco and Arcelor Mittal all pulled back on Indian investment plans. ArcelorMittal dropped its plans to build a steel plant, worth $8.4 billion, in Odisha, over extended delays and problems in acquiring land. ArcelorMittal's decision is one of the biggest foreign investor exits from India and the company was upfront about why it decided to leave.

"ArcelorMittal has not been able to acquire the requisite land for the steel plant, nor has it been able to ensure captive iron ore security, which is a necessary requirement for the project. Therefore, taking into account the current economic climate, ArcelorMittal has concluded it will no longer be pursuing its plans for a steel plant in Keonjhar," said the company.

Unfortunately, the Indian government has failed to create a simple and clear policy foundation that would have sorted issues like mines allotment and land acquisition.

Uncertainty leading up to India's elections, set for next year are also adding to concerns.

"There is just the huge confusion on what next. Any investor into India will be wise to wait because there will be volatility in policy that is short term in design," said Krishna K Gupta, chairman of Massachusetts-headquartered global strategic advisory firm Romulus Advisory.

Foreign investors have soured on India at a time when Finance Minister P Chidambaram had been hoping to revive the economy's mojo by attracting some $20 billion in new investment to fund the persistent current account deficit without depleting India's $300 billion in foreign exchange reserves.

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Updated Date: Dec 20, 2014 21:42:36 IST