Effectively, foreign portfolio investment in Indian companies can now go up (from 30 per cent) to 40 per cent of their paid-up capital. This raises the question, is their a dearth of domestic savings for investment in equity? The fact is that financial savings are substantial and rising, but these are flowing largely into small savings (government sponsored instruments), bank deposits and corporate debt. This preference of domestic savers is a sad commentary on the secondary and (more importantly) the primary markets, and on the confidence corporates inspire in potential Indian investors. Flagging private corporate investment has eroded investor confidence. This needs to be addressed by the government and the representative organisations of business (CII, FICCI and others). The point will not be missed that given the on-going state of affairs, it is unlikely that foreign (including NRI) investment will occupy the ground ignored by domesticsavers.

The new ceilings raise two issues. First, they create space for foreign portfolio investors to go in for take-overs. This is not to say that they will, but who can say what will happen in the future? Second, since foreign portfolio investment can come in and walk out at will (in this regard, the rupee is fully convertible), the new ceilings add to the vulnerability of the country's external account. Instead of wooing foreign portfolio investment, it will be worthwhile sorting out the issues holding up foreign direct investment, notably, in civil aviation, telecom and power.