By AMITENDU PALIT, Business Times – The World Investment Report (WIR) of 2008 prepared by the United Nations Conference on Trade and Development is a shot in the arm for India’s foreign direct investment (FDI) prospects. The report affirms India as the second most attractive FDI destination in the world after China. This should indeed be encouraging news at a time when the Indian economy is struggling to cope with rising prices and tumbling stocks.
India’s FDI performance has been distinctly impressive in the last couple of years. Since 2006, FDI inflows into India have increased sharply. The year 2006 was a departure from the trend, with FDI crossing US$10 billion for the first time. The year finally ended with FDI inflows rising to as much as US$19.7 billion, a spectacular increase from US$7.6 billion in 2005. The inflows continued in 2007 and stood at US$23 billion.
A comparison of FDI inflows into different Asian economies in 2007 highlights India’s emergence as one of the favourite FDI destinations in the region. India absorbed 74.8 per cent of the total FDI into South Asia in 2007. It was also the fourth largest recipient of FDI in South Asia, East Asia and South-east Asia, after China (US$83.5 billion), Hong Kong (US$59.9 billion) and Singapore (US$24.1 billion).
Gap has narrowed
This was the recipient order in 2006 as well. It is interesting to note that the gap between FDI flowing to Singapore and India has gradually narrowed – the FDI gap between the two countries was US$1.1 billion in 2007, compared to US$6.3 billion in 2005. Indeed, while FDI into Singapore has gone down by US$606 million in 2007 compared to 2006, that into India has gone up by US$3.3 billion.
India was the fifth best FDI performer in the whole of Asia and the eighth largest FDI recipient in the developing world in 2007. Russia (US$52.5 billion), Brazil (US$34.6 billion) and Mexico (US$24.7 billion) drew more FDI than India during the year.
India is also one of the leading economies in terms of FDI outflow. In 2007, FDI outflow from India was US$13.7 billion, up by almost US$1 billion from US$12.8 billion in 2006. Hong Kong (US$53.2 billion), China (US$22.5 billion) and South Korea (US$15.3 billion) were the three other Asian economies with more outflows than India.
India’s outward FDI exceeded those of Singapore (US$12.3 billion), Taiwan (US$11.1 billion) and Malaysia (US$11 billion). Among the rest of the BRICs (Brazil, Russia, India and China), FDI outflow from Brazil (US$7.1 billion) was lower than India’s while that from Russia was higher (US$45.7 billion).
The WIR 2008 has categorised East Asian, South Asian and South-east Asian economies into five distinct investment ranges according to individual FDI inflows and outflows. In terms of FDI inflows, only China and Hong Kong figure in the top range (US$50 billion and more) while India and Singapore figure in the second (US$10-US$49) billion.
These two economies also figure in the same range for outward FDI, along with China, Korea, Taiwan and Malaysia.
Among other South Asian economies, Pakistan figures in the third and middle-most range (US$1-9 billion) in FDI inflows. Bangladesh and Sri Lanka figure in the fourth range (US$0.1-0.9 billion), while Bhutan, Maldives and Nepal are in the last (less than US$0.1 billion). In terms of FDI outflows, Pakistan, Sri Lanka and Bangladesh figure in the lowest range.
The categorisation brings out the large discrepancies within the South Asian region in FDI performance. India is clearly the frontrunner in both FDI inflows and outflows. Pakistan follows at a distance second in FDI inflows, with such flows into the Pakistani economy having picked up during the last three years. The rest of the region, however, is yet to draw significant FDI.
Indeed, the 19 per cent increase experienced by FDI inflows into South Asia in 2007 vis-à-vis 2006 is almost wholly attributable to larger flows into India and Pakistan. The bulk of these flows were in services. Telecommunications and information technology-enabled services in India attracted new investments from Vodafone and Oracle.
Two other service sectors in India that have emerged as key segments for FDI are real estate and retail trade. Integrated township development projects are witnessing large multinational investments, including expatriate FDI. Retail trade, on the other hand, shows enormous prospects, with India adopting encouraging policies for organised retailing.
The policy of allowing single-brand foreign retailers to own up to 51 per cent foreign equity in joint ventures has been a major boost for FDI. A survey carried out by the WIR 2008 shows that out of the total sample of retailers surveyed, more than a quarter have already opened or are planning to open outlets in India.
In a similar vein, enabling policies have also acted as ‘pull’ factors for FDI in Pakistan with banking, telecommunications and energy being the key sectors.
While services are attracting most of the FDI into India, FDI outflows from India are in manufacturing and services. India’s outward FDI is spreading out in Europe as well as in Africa and Asia. A key aspect of such FDI is the emphasis on resource-intensive activities like mining and energy.
The WIR 2008 notes that India’s free trade agreement with Asean and bilateral trade and investment negotiations with the European Union can be enabling factors in enhancing Indian FDI in Asia and Europe.
New overseas assets
A key factor determining growth of outward FDI from India in the foreseeable future is the ability of its large investors to generate enough surpluses for investing in new overseas assets. This is much less of a critical factor for East Asia and South-east Asia since several investors from the latter (for example, Temasek, Khazanah and China Investment Corporation) are sovereign wealth funds (SWFs).
These SWFs are expected to maintain the momentum of outward FDI from the region. However, FDI from India is not attributable to SWFs but to large private enterprises (for example, Tata, Reliance Industries, Videocon, Infosys, Satyam and UB Group). Sustenance of high levels of outward FDI from India will depend on whether these firms are able to have enough retained earnings, notwithstanding a moderation in global and regional economic prospects.
The prospects for inward FDI in India, however, appear reasonably bright. Reforms in telecommunications and retail have paid dividends. Implementation of more encouraging FDI policy measures in banking and insurance will see further increase in such flows in 2008.
At the same time, a change in risk perceptions of global investors can also facilitate FDI. The financial meltdown in the United States and the concomitant risk-averse sentiments acquired by global investors can encourage a closer look at longer-term FDI vis-à-vis shorter-term portfolio investments.
Given that returns from investment in India continue to remain one of the highest among emerging markets, such perceptions can boost FDI into India.
