India Remains a Top Global Destination for Foreign Investment

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DELHI – India is still an attractive destination for foreign investment, and remains a top market for FDI globally, according to Ernst & Young’s attractiveness survey, “India 2014: Enabling the Prospects,” released last week. The survey of over 500 international business leaders painted an optimistic picture of an economy that has weakened in recent years.

India’s growth slowed in 2011 and 2012, largely as a result of the global economic downturn, combined with the emergence of some domestic problems. However, the report notes that both the medium and long-term outlooks for India remain positive: “Favorable demographics and recent government reforms are expected to accelerate expansion over the medium term, making India the world’s fifth-fastest growing economy by 2015.” Of the respondents surveyed, almost 29 percent expect India will be among the top three economies by 2020, particularly in terms of economic growth and manufacturing.

The main drivers of growth were cited as being a solid domestic market, an educated workforce, and competitive labor costs. Other strengths include India’s telecommunications infrastructure and its strong management and business education system.

India’s share of global FDI investment in 2012 was 5.5 percent in terms of value and 6.3 percent in terms of projects. India accounted for 9.4 percent of jobs created by FDI globally in the same year. Globally, its share of projects placed it as the fourth-largest FDI recipient, ranking behind the US, China and the UK. The vast majority of respondents (over 70 percent) saw China as India’s main FDI competitor, though Indonesia, the Philippines, and Vietnam are also becoming threats. Nevertheless, India’s share of FDI inflows into emerging markets remains substantial — among respondents with an emerging market strategy, India accounted for over 20 percent of their total capital allocated to emerging markets.

One change to note is that India’s pool of business partners is becoming increasingly diverse. Though the US, Western Europe and Japan still account for the majority of India’s FDI inflows, India has been attracting attention elsewhere. In 2012, India saw a remarkable 123.3 percent rise in the number of FDI projects originating from the Middle East, mostly in the financial services industry, and continues to see expanding investment from Southeast Asian countries (particularly Singapore, Malaysia and Thailand).

The Technology, Media and Telecommunications (TMT) sector remains the most attractive to investors, with 21.6 percent of projects in the period 2007 to 2012. Industrial and business services rounded out the top three sectors, with 16.6 and 11.4 percent of projects respectively. The lead enjoyed by TMT is only expected to widen over the next two years, as investors predict TMT will account for 29.9 percent of projects, with Infrastructure rising to become the next most attractive sector at 11.3 percent.

The report cited the legislative and administrative environment, transport and logistics infrastructure, corporate taxation, ease of doing business, and flexibility of India’s labor laws as being challenges the country currently faces. Despite these challenges, India offers two distinct advantages: its population, with a burgeoning middle class market and strong domestic consumption; and its skilled and low-cost workforce. EY listed six priority measures for improving India’s investment climate:

  • Enhance the business environment
  • Develop infrastructure
  • Advance the factors of production (through improving labor laws and access to capital)
  • Improve the taxation system
  • Eliminate FDI-related barriers
  • Raise awareness of emerging cities

The government has already taken initiatives towards improving the country’s business environment, and over the past two years, has increased FDI ceilings for the retail, airline, telecommunications, financial and defense sectors. These reforms are expected to accelerate expansion over the medium term — Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, predicts India’s economy is well positioned to get back to annual growth of around 8 percent in the next two years. India now needs to capitalize on this momentum and implement its policy changes effectively in order to realize its full FDI potential.

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