Robust capital flows are a prerequisite for sustaining India’s current growth rates. GoI has been shoring up growth through a capex push funded mainly by domestic borrowing. This will taper off as private investment revives and corporate credit demand picks up. So far, the private sector is being capitalised by the equity markets as government borrowing squeezes resource provisioning. A private sector capex cycle should not have to run into higher borrowing costs if the investor base for both equities and debt is broadened. More foreign debt also improves productivity by facilitating privatisation. This, in turn, is aided by strong equity inflows that provide viable exit options for GoI.
The increased visibility offered by India’s growing heft in global equity indices provides an opportunity to plug itself deeper into the international capital market. The approach towards relaxing capital controls should be balanced by the need for financial stability. Increasing flexibility for financial sector investments abroad has a direct implication on the cost of long-term capital needed for infrastructure, thereby easing some pressure on government finances that undertake most of its provisioning.
