Investment climate in India

The Bombay Sensex has now crossed the 7600 mark and is bound for a correction that may be around 10% in the short run. However, analysts say that the Indian economy is doing well and the market cap/GDP ratio is still not as high as some of the other emerging markets. The bullish run in the Stock market has been mainly driven by FII flows into the market, especially from Japan. Even though japan invests only 0.2% of its foreign funds into the Indian market, yet the change can be seen already. The profits of Indian Inc. have gone up 300% over the past 2 years, whereas the market has only gone up by 120%. Mutual fund managers believe that if the Indian economy continues to perform at 5-6% over the next 10 years, the Sensex may even cross 30,000. This is not only possible, but probable too, provided the political situation in India remains stable and so do the interest rates. Compared to the global interest rates, Indian interest rates are 2-3% points higher, so as India becomes more integrated with the world economy, the domestic interest rates should actually decline. The other major worry are the oil prices that are now consistently over 60$ a barrel. This can be the only damp squib on an otherwise healthy fiscal environment. For India to be self sufficient in energy production, it has to look for new avenues both locally and abroad. Recent gas finds in Andhra and Gujarat just go to show that India has yet to unleash its hidden energy capabilities. The oil pipelines from Iran and Kazakhastan can further sharpen India's oil price shock absorptive capacity. Terrorism is the other big challenge that hampers the investment climate in India. The B grade investment climate as suggested by credit agencies can only change if India is able to make peace with all its neighbours and simultaneouslly reduce the state budget deficits.