Indian policy-makers have illustrated clearly the unintended consequences of bad regulation. The government limits foreign investment in the domestic bond market to just 1%, as a guard against the country becoming victim to hot money flows. India is also notorious for its restrictions on foreign direct investment (FDI), with vast areas of the economy off limits to international companies, and so denied their technology and capital. Unfavourable comparisons between Indian and Chinese economic performance usually highlight the low levels of FDI in India.
However, India’s equity markets are open to foreign investment. Since overseas companies cannot invest directly, they have turned instead to portfolio investment (FII), in the form of share purchases, making India’s annual FII flows nearly three times as high as its net annual FDI flows.
