Session 4: Firms and investment
Chaired by Rakesh Sarwal (Planning Commission), session 4 focused on the role of firms and investment in the growth process. Nirvikar Singh (University of California, Santa Cruz) presented research arguing that foreign investors do not destabilise the local Indian stock market and instead can bring additional capital into the economy during boom times. Singh also suggested that there is no evidence for foreign portfolio investors bringing crises with them into the local Indian stock market. While they can exacerbate extreme movements in stock price returns, they can also help to stabilise prices and bring capital to the market.
The second presenter, Ila Patnaik (National Institute for Public Finance and Policy), presented her research findings about the investment technology of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) in India. As part of her research, she compared stock selection patterns of FIIs and DIIs and found surprisingly large differences. Among others, FIIs appear to select firms do not have a large promoter ownership, are young and have small physical assets; the pattern for DIIs is the opposite. The most interesting, and perhaps most surprising result is that FIIs seem to be much less successful than DIIs at selecting stock yielding a high market return. Overall, high FII investment is a relatively poor predictor of growth, which implies that tweaks and improvements to the organisation of the investment regime in India might be warranted.
Anupam Khanna (Chief Economist and Director-General Policy Outreach at NASSCOM) presented his policy perspective on both research papers, raising questions about the concentration and benefits of FDI. He also stressed the importance of taking a look at the FDI impact of average firms, as well as the growth impact of investors that do not fall under the FII and DII categories.