News: India shining despite mkt plunge

(IBN 08/06/2006) Washington DC - There is finally some good news for the Indian economy. A recent World Bank report says that investors will continue to show strong interest in developing economies like India.

However, with the recent plunge in global markets, including last month's crash at the Bombay Stock Exchange, is the report being too optimistic?

The sharp rise in capital inflows to developing countries last year came despite high oil prices, rising global interest rates and growing global payments imbalances.

According to the World Bank's Global Development Report:

• Net private capital flows to developing countries reached a record high of $491 billion in 2005, up from $397 billion in 2004.
• For South Asia the figure rose nearly three-fold, from $8 billion in 2003 to almost $24 billion last year.
• Most of this money poured into India went into the country's strong equities market.

Says senior economist World Bank, Andrew Burns, "One of the things we see in south Asia in general is that the increase in flow towards that region has been in equities as opposed to foreign direct investment or bond-lending. That's obviously a reflection of people's interest in stock market in the new dynamic companies that investors see in India."

But recently that interest has turned into nervousness following the recent crash of most of the Asian stock markets including India and Japan.

Experts say that has put the brakes on the frenzied inflows.

"This is a cyclical market and the flows go up and they may go down. What we've observed over the last six to seven weeks is a clear pause in flows towards developing countries but also in high income countries, so we've seen the stock market in US fall," says Burns.

Add to that the impact of rising global oil prices that according to the World Bank has increased India's deficit by 0.7 per cent of the GDP between 2002 and 2005.

The latest oil price hike could help ease that burden but will lead to an increase in inflationary pressures in the country this year.

But despite these challenges experts forecast continued growth in private investments in India, especially in the IT and service sectors.