FIRM GRIP ON THE ECONOMY: Sinha and his team before he presents Budget 2002

K V. Shamsudheen is a happy man, and so are his 2,000 clients for whom he buys and sells Indian shares. "They all plan to invest much more in Indian markets now," says Shamsudheen, managing director Barjeel Securities LLC, an India-focused brokerage outfit in Dubai. "They have now got the comfort level. They are very happy," he adds.

Ever since Finance Minister Yashwant Sinha announced in his budget of February 28, the relaxing of rules in capital account convertibility and repatriation of earnings, Non-Resident Indians (NRIs) have been busy making calls to their investment advisers. Sinha has allowed NRIs, who have more than $20 billion in deposits in India, to freely repatriate in foreign currency all their current earnings in the country. India's total foreign exchange reserves stand at $50 billion.

Economy

SINHASPEAK NRIs will be free to repatriate in foreign currency their current earnings in India such as rent, dividend, pension, interest and the like, based on appropriate certification. There will be full convertibility of deposit schemes for NRIs. The existing Foreign Currency Non-Resident-B scheme and the Non-Resident External Rupee accounts will continue to be repatriable. The schemes which do not offer full convertibility to NRIs will be discontinued from April 1, 2001. The existing balances in the non-resident (non-repatriable) rupee accounts will be allowed to be credited on maturity to the convertible NRE account.

Even though the new rules allow them to withdraw money freely, NRIs have been evincing keener interest in routing more investments into the country. Finance experts estimate that a few billion dollars may flow into India over the next few months alone.

The reason is simple. "The interest rates on deposits are still very attractive in India compared to other markets, even after factoring in rupee depreciation. Interest of up to 8 per cent can be earned here as against 2-2.5 per cent in several developed markets. So while withdrawals cannot be ruled out, we feel that the confidence of being able to repatriate your money at any point in time will boost investment flows from NRIs," says Kaikhushru Dinshaw, head of NRI business at HSBC India.

At the same time, a large number of Indians residing abroad are salaried people and hence route their investments into the country to support their families or build long-term assets. "There have been very few people here who have even in the past actually withdrawn money from India and brought it back, for typically they send money to their families back home to enable them to enhance their standard of living," says Shamsudheen.

Economy

"The proposals show that India is sensitive to NRI needs." Bhisma Agnihotri, Ambassador-at-large in the US "NRIs now have the comfort level and plan to invest more in India." K.V. Shamsudheen, MD, Barjeel Securities LLC, Dubai "Capital account convertibility will eliminate inhibitions." Narsi Narasimhan, Management consultant, New York "It will help enhance India's public relations issues in the US." Dr Beheruz Sethna, Professor, West Georgia "The confidence will boost investment flows from NRIs." Kaikhushru Dinshaw, Head, NRI business, HSBC India

Of course, there is a growing breed of entrepreneurs and high net worth individuals who would like to have the flexibility and the option to bring back their earnings in foreign currency.

In other words, Indians will now feel more comfortable about investing in India, as they would now be able to withdraw their money as and when the need arises. Clearly, on this front at least, Sinha's budget has created the "feel good" factor.

"More than just a feel good factor, the move is a strong signal towards full convertibility. NRIs are sophisticated investors and we feel that as they invest more in India, it would send the right signals to other international investors as well," says Dinshaw. "This could increase India's weightage," he adds.

NRIs were allowed, even in the past, to repatriate their earnings but this facility was available only to a few deposit schemes and required extensive documentation. Now all deposit schemes for NRIs will be fully convertible and those that are not fully convertible, will be discontinued from April 1, 2002.

"NRIs are now being told 'this is your money and it is your choice what you want to do with it'. This spells confidence," says a Reserve Bank of India (RBI) source. RBI notified the rules on March 4. The country's Central bank which controls foreign exchange flows has said that the non-resident non-repatriable (NRNR) and non-resident special rupee (NRSR) account schemes will be discontinued from April 1, 2002.

Clearly, the year has been good so far for NRIs. Says India's Ambassador-at-large to USA, Bhisma Agnihotri: "First, we had the diaspora report, where the recommendation of dual citizenship has been accepted in principle by the prime minister for some countries, including USA. And now there are a lot of goodies for NRIs in the budget. Full convertibility of deposits is great," he says. "This shows that the Government is sensitive to the needs of NRIs."

Says Narayan S.A., chief executive officer of Kotak Securities: "NRIs who would like to trade regularly in shares would stand to gain from these measures as they would further ease the procedures." Again, NRIs are largely long-term investors and not many of them have so far actively traded in Indian securities. If they do so now, then it could give a big boost to liquidity in the Indian capital markets.

Shamsudheen says that the Indian Government must now come up with some saving schemes for the smaller income NRIs, who often end up sending most of their savings back home to take care of their families.

"Further liberalisation of capital markets for NRIs is good news for India. It will encourage more of them to consider India as an investment destination. Hopefully, it will be as good as what China and Mexico have experienced recently," says Dr Jagdish N. Sheth, Charles H. Kellstadt professor of marketing, Emory University Business School at Georgia.

Striking a sentimental chord, Narsi Narasimhan, management consultant to hi-tech startups, feels that even if the return on investment is poorer in India compared to other countries, NRIs would prefer helping their "motherland" as long as their investments are not locked in. "Capital account convertibility eliminates any inhibition that an NRI investor may have," he says.

Even though India currently has a substantial foreign exchange reserve, larger NRI investments would enhance the country's business and tax climate. "Also, I believe it will help enhance India's public relations issues in the US and many other countries," says Dr Beheruz N. Sethna, professor of business administration, State University of West Georgia.

The feeling is no different in Britain. Matthew Panikar of Reliance Industries says that the bright spot in the budget, from an NRI perspective, is that money earned from rentals and pension can be remitted. "But eventually the Indian Government should also include capital account convertibility," he says.

The right noises have been made. Only time will tell how much of it translates into money flowing in or out.

-with Anil Padmanabhan in New York