India remains an attractive destination for Foreign Direct Investments, seeing around $34.4 billion enter the economy in 2014, research by Arthur D. Little shows. Much of that money (10.5%) goes towards investments in services, followed by telecommunications (9.4%). Although the majority of investors are more positive about India's economic development of than they were last year, barriers remain, including infrastructure and government legislation.
Foreign Direct Investment (FDI) generates considerable benefits to economies towards which it flows. Externalities such as better business models, processes, technologies, training and best practises are stimulated through such investments. FDI also tends to bring with it job-led economic growth, something which emerging economies are keen to capitalise on. FDI remains critically important even in well developed economies such as the UK, which still sees considerable inflows according to a recent Grant Thornton report.
Recent research by Arthur D. Little, in collaboration with the Associated Chambers of Commerce of India (Assocham), titled ‘India - Investment Opportunity’, explores FDI entry into India, as well as the sentiment of investors in the Indian economy. The report is developed from an analysis of the Indian market as such, and is complemented with the answers of more than 100 investors and business leaders in India and internationally about their current perception of the Indian economy.
The good news for India is that its FDI inflow has seen an increase of $9.1 billion, from $25.3 in 2007 to $34.4 billion in 2014. Other big winners have been China, where FDI increased from $83.5 billion to $129 billion, and Brazil. Particularly developed economies have seen considerable decreases in FDI. The UK is down almost $110 billion since 2007, while Japan lost 90% of its FDI over seven years.
The increase in inflow is positive for the expansion aims of India’s long term economic plans, as the country is now in need of both domestic investment as well as FDI. The country’s savings and investment rates were between 600 and 800 basis points lower in 2012 & 2013 compared to 2007 & 2008; the result of poor natural resource utilisation and labour productivity. According to the report, to bring about the much needed investment in the economy, FDI is a must.
In terms of a breakdown of FDI into India, the last three years show a relatively mixed bag. 2013 was a low year compared to 2012 when the country benefited from $29.7 billion in investments. The number of FDI projects has increased since the start of Shri Narendra Modi’s government, suggesting that investors have been more confident in the country’s direction.
The research also tracked the destination of FDI in financial year 2014-15 and finds that the largest chunk, 10.5% or $3.2 billion, was invested in the services industry. Telecommunication followed, with investments of $2.8 billion, while trading saw $2.7 billion or 8.9% of the total. Services, such as computer software & hardware and auto also attracted significant FDI inflows worth $2.5 billion and $1.1 billion respectively. This, according to the researchers, showcases the positive effort of government initiatives such as ‘Make in India’ and ‘Digital India’.
The largest inflow of money came from Mauritius (35% of the total). This is largely due to India’s Double Taxation Avoidance Agreements with Mauritius. Singapore is the second largest investor source (14%) and the UK, the old colonial power, comes in third with 9% of total.
To find out what investors think about investing in India, Arthur D. Little asked more than 100 investors and business leaders about their current perception of the Indian economy. The majority (51%) of respondents are positive about the country’s outlook compared to a year earlier, while 34% are seeing the future to be bleaker. The qualities of the Indian economy most affecting respondents are the domestic market at 41%, technical talent at 30%, new government incentives at 17% and investor protection at 12%.
The country’s poor infrastructure is seen as the biggest barrier for FDI investors (31%), followed by tax complexity (19%) and government regulations (16%).
The most concerning macroeconomic features are high interest costs as cited by 39% of respondents, while real GDP growth is a concern for 19%. The biggest concerns investors have in the Indian economy is legislative delay, cited by 37% of all respondents, followed by poor infrastructure (21%) and the high cost of capital (17%).