CHENNAI: We have heard it time and again: Capital sources for India are drying up. But why should the man on the street be really bothered? India has been a big beneficiary of free-flowing foreign capital. Apart from being partially responsible for the stock market rise (and fall), the huge inflows of cash were equivalent to 25% of the gross capital formation (a component of GDP calculation). The presence of the foreign capital accelerated the country's economic growth previously. But with the capital 'inflow' scenario changing for now, experts say that both the economy and India Inc will have to face the consequences. "This will have implications for growth, interest rates, corporate balance sheet risks, and leverage," Citigroup analyst Aditya Narain said. Rising capital flows (in form of FII net investments, ECBs, FDI etc) has been seen to bear a positive correlation with domestic investments. Simply put, rising forex inflows have been matched with the rise in domestic investments almost at the same time. Large capital inflows have supplemented domestic savings and effectively bumped up India's investment and growth momentum. "Rising investment momentum, and its increasing share in overall GDP, suggests capital inflows have had a large part to play in the recent growth acceleration," Narain elaborated. Capital flows form a part of the capital formation. Capital sources such as FII net inflows for calendar year have turned negative at Rs 52,000 crore. The amount raised through fresh equity issues (at the stock market) stand at Rs 16,900 crore - less than half of what was raised in FY '07. Money coming through external commercial borrowings, at Rs 81,850 crore, too are less in comparison to Rs 133,277 crore in 2007. Sources of capital as percentage of India's GDP stands at 3.6% in 2008 - a swing of close to 5% points from the 8.4% in 2007, data from Edelweiss Securities show. Naturally, there is feeling that growth rate of capital formation (which grew by over 18% last year) may slow down and contribute to a lower GDP growth rate. While a high GDP growth means more jobs, opportunities and income for citizens, a slower growth would mean less of all the above! "Capital formation has been a key driver of growth for India. It has been high compared to the past, and in comparison to other countries. Capital formation is volatile and as it becomes larger, it makes the economy more prone to a cyclical slowdown," Prasad Jaligama of Edelweiss' strategic think-tank feels. He optimistically adds that growth might return. "Capital formation has never declined two years in a row in the last 10 years and policy measures will work, given time." N.Sukumar Research Analyst www.kences1.blogspot.com --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
