By Dipankar Mitra
India is more global than is given credit for. Hence it sounded impressive when Union Minister Piyush Goyal recently hinted at India’s exports (inclusive of goods and services) touching USD750 billion during FY23. What stands out, however, is that it translates to a good 22% of the USD 3.4 trillion economy.
A lesser-known fact is India is in a way more globalized with total trade (imports and exports of both goods and services together) at 45% of GDP is significantly higher than major economies including China and Japan – both at 37% or US at 25%.
The Indian diaspora constitutes around 33 million people living abroad, i.e., nearly half the population of UK or France according them visibility at the leading positions of corporates and governments abroad and making India the highest recipient of remittance that hit a record of USD 100 billion in 2022.
More Indians travel abroad for business, tourism and education and if three Indian air carriers placing 500 plus aircrafts is any indicator, this trend is only going to accentuate.
And just to highlight one aspect of India’s global cultural outreach, the overseas collection of the blockbuster movie Pathaan nearing USD 50 million has exceeded India’s collection of the Hollywood landmark Avatar: The Way of Water.
Oddly even with such deep external trade, education, and cultural exchanges when it comes to investment abroad, especially financial investment, India is somewhat reticent.
While we are overall surplus in our external (BoP) account and surplus in trade account barring oil imports; the deficit on the current account particularly the oil pool has led us to adopt a more restrictive approach toward financial investment.
Thus, overseas financial investment is allowed broadly through two different routes. The first one is through domestic mutual funds who can invest directly in companies abroad or can act as feeder funds to selected schemes run by funds abroad.
This route operates within an overall cap of USD 7 billion at the aggregate industry level which at present is nearly exhausted and de facto closed for subscription barring a smaller additional window of investment through ETFs that is open till it hits the limit of USD 1 billion.
The second and a more popular option among HNIs is the LRS route whereby resident individuals including minors are allowed to freely remit up to USD 250,000 per financial year per person for any permissible current or capital account transactions.
Assuming a family of four this translates into a USD 1 million per family limit per year. This perforce brings the global allocation to an overall 10-20% prudent limit of a geographically diversified portfolio.
The LRS route can be availed through a host of tech enabled platforms that facilitate access to a wide range of instruments largely through DIY (do-it-yourself) mode. The second and more popular option among HNIs is the route provided by the investment industry offering specific vehicles for global investments with embedded insights into the merits of such investments.
Before anyone stumps into the question, why go abroad in the first place with India offering the best opportunity on the back of its demographic dividend and higher growth potential, one may note that going global isn’t really going far.
Consider the fact that despite the crash of 2022 faced by US particularly in the tech sector and relative outperformance by India during this period, the three-year return of the two markets since Covid-19 (Feb-20) are similar (around 11% CAGR) in USD terms. The previous three years too was a similar but low return phase for both the markets (around 7%).
However, beyond the headlines, the US market provides access to world’s leading companies, a much wider pool of liquidity a host of investment styles and instruments that are either not available or sparsely available domestically.
The second object of going abroad is to tap into the ‘correlation’ of markets or the absence of it – viz., the benefit that one can reap from the fact that all markets do no run simultaneously and global portfolios balance out the dry phase of the domestic market providing higher stability.
From time-to-time emerging markets be it China, Brazil, Taiwan, or Turkey throw up outsized opportunities for alpha generation provided one can navigate through the volatility of such markets with research-driven investment methodologies.
Global investment through LRS also provides the flexibility of need-based usage of such funds for investment in real estate, education or business at a later date. Thus, from the standpoint of the diversified source of return with stability and flexibility global diversification brings stand-out benefits.
(Author is Director, Research at ASK Private Wealth)
The views and opinions expressed in this article are personal. Readers before acting on any information herein should make their own investigation and seek appropriate advice.