|
The headline that became the cause of much celebration
Financial Times, 29-Sep-2015
http://www.ft.com/intl/cms/s/3/fdd0e3c2-65fc-11e5-97d0-1456a776a4f5.html#axzz3sbevIoqY
The Indian Government and our media rejoiced when Financial Times splashed this headline on an article recently, which showcased how India is running ahead of China and the US in attracting FDI investments in 2015. In the first half of the year, FT reported that India attracted $ 31Bn, higher than China and US, which stood at $ 28 Bn and $ 27 Bn respectively.
The facts
Foreign Direct Investment into India jumped a substantial 250% in the first half of 2015, to USD 31 billion, according to the Financial Times. FDI into India was USD 12 billion in the same period of the previous year.
Last year India was ranked fifth in the world for FDI inflows, after China, the US, the UK and Mexico.The leap in 2015 could push India to the top position in attracting FDI for green field projects; edging out both the U.S. and China, hitherto the competitors for the top spot. In the first six months of this year, India pulled in $3 billion more in green field investments than China and $4 billion more than the U.S.A. Whichever way one sees this, this is a considerable achievement for India. More so when FDI into other emerging markets have recorded sharp falls. Indeed 97 of 154 emerging markets witnessed declines in FDI flows this year. (FT, September 29, 2015)
Are these the full facts?
Studies by the brokerage firm Emkay Global, quoted in the Economic Times, revealed that most of the FDI was aimed at domestic consumption, rather than at manufacturing or the PM's pet project of 'Make in India'. FDI has gone mainly into e-commerce, cash and carry, and automobiles, while the construction and manufacturing industries have seen declines. "It is indeed true that there has been an increase in FDI inflows (including green field and cross border M&A) into India in the hope of a turnaround in growth outlook, and this bodes well for the external sector to withstand potential BoP (Balance of Payment) volatility arising from potential decline in global excess liquidity," the report said. (Economic Times 22 Oct, 2015). At this juncture, it does appear that foreign investors have reposed more faith in "Sell in India" rather than "Make in India" - which is why most of the FDI has actually gone into e-commerce and other selling related ventures.
On another plane the study revealed that gross FDI flows into China exceeded that into India by 3.6 times. It is only when 'net FDI' is calculated, after taking into account FDI outflows as well, that India beats China. Since China has been investing a lot overseas, the net FDI flow shows a lower overall figure.
Some analysts point out that FDI inflows into India increased by just 15% in the first half. However FDI outflows collapsed 80%. Both these movements, pulling in the opposite directions has led to the apparent high figures put out by the government.
"It will be premature to extrapolate the recent upsurge in FDI inflows as proof of revival in the investment cycle in India," the Emkay Global study said.
Upbeat forecast
As with most narratives, this story too has a different side to it. A survey of more than five hundred decision makers from multinational companies revealed that India was the most attractive destination for FDI. China came in second. The survey was conducted by Ernest &Young, (EY), in March and April of this year and covered diverse industries such as technology, infrastructure, financial services, consumer products, automobiles and consumer products.
The grounds for optimism
The respondents to EY's study revealed the reasons for their current optimism regarding the investment climate in India. The project of hundred Smart Cities and infrastructure would be significant reforms, 89% of the potential investors said, while 83% felt that the government's efforts for financial inclusion and the Digital India initiative were drivers for investment. An equal number felt that the government's proposal to reduce corporate taxation to 25% would be a key driver for growth. Investors expressed the view that passing critical legislations like the Goods and Services Tax act, GST, would further encourage investment. A good proportion wanted early action on the land bill, the existing legislation being an investment dampener.
Many other factors enhanced India's appeal as a destination for investment. Many of those interviewed pointed to India's low labor costs, macroeconomic stability, availability of skilled labor, a stable political environment, research and development facilities, innovative businesses and a humungous domestic consumer market. Further, the steady economic growth of near about 7% is also helping to draw in investments.
Most of the FDI is going to Pune, Delhi-NCR, Mumbai, Chennai and Bengaluru regions. Other attractive destinations are Vadodara, Ahmedabad, Visakhapatnam Coimbatore and Jaipur.
Going forward
A real surprise disclosed by the study was the level of optimism about India's place in the global economic order five years from now. Compared to the 2014 survey, the proportion of respondents who believe that India will be among the world's leading top three destinations for manufacturing by 2020 has risen to 35% from 24%', EY said.
It is imperative that the government build on such tailwinds, push the reform process and put the economy on a higher growth path. The government has taken the right step in announcing liberalization of FDI norms in 15 sectors. These cover major areas like civil aviation, defence, broadcasting and mining. In tandem, the government has also hiked the limit for single window clearance exercised by the Foreign Investment Promotion Board, FIPB, to Rs. 5,000 crores. The present limit is Rs. 3,000 crores. Another forward looking step is the easing on sourcing rules for 'single brand' retail, chiefly in the high tech sector. These firms would also be able to sell online without specific permissions.
"Over the last year, the improvements in India's macroeconomic indicators, accompanied with the ongoing efforts to revitalize growth have offered new hope to investors," said Rajiv Memani, chairman of the global emerging markets committee and India regional managing partner at EY.
The bottom line is this: our No 1 position is on the metric of net flows and not gross inflows. Inflows this year are not really in the manufacturing space, which is where we want FDI flows desperately. There is lot of room for optimism on FDI, as demonstrated in the EY poll, but we must remember that a large part of this optimism comes from the hope that there will be rapid execution on ground of all the announcements made by the Government in its "Make in India" campaign and its "Ease of Doing Business" thrust. For us to emerge as a genuine No 1 FDI destination, execution of these promises will be the key.
Share your thoughts and perspectives
Do you have any observations or insights or perspectives to share on this issue? Did this help you understand the topic better? Do you disagree with some of the observations? Please post your comments in the box below ..... it's YOUR forum !
Share this article
|
