Indian Companies Refocus Investment Domestically

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MUMBAI – Further signaling renewed faith in India’s economic prowess, overseas direct investment by Indian companies fell in recent months, dropping from US$15.24 billion in April 2013 to US$5.58 billion last month.

Declining overseas investment by Indian companies – and a refocusing of resources and capital on domestic operations – indicates a larger migration of manufacturing and operations back to India as the BJP’s decisive victory in national elections raises hopes for a post-election economic revival.

The new data released Monday by the Reserve Bank of India indicates that overseas FDI in April 2014 stood at US$1.15 billion in equity, US$268.16 million in loans and US$4.16 billion in guarantees.

Amtek Auto, Elder Pharmaceuticals, Haldia Coke, JSW Steel, Serum Institute and Bharti Airtel were among major Indian companies investing in foreign markets this year. Most of these investments were in joint ventures and wholly-owned subsidiaries across Europe, Asia and the Middle East.

While overseas investments in April increased slightly over March (by around US$35 million), Indian companies are overall investing less overseas than they were in early 2013, but more than during India’s economic slowdown.

With economists projecting economic growth of 6.5 to 7 percent in 2015-2016 even before specific policy initiatives are announced by the incoming BJP, both Indian and foreign companies appear eager to prepare their India-based operations for a domestic economic boom.

Signs the incoming BJP may reconsider several of India’s free trade agreements (FTAs) is also fostering hope that a nuanced approach to international trade will boost domestic manufacturing opportunities.

According to Ministry of Finance officials, a working group is currently evaluating possible negative effects on domestic manufacturing from India’s 20 FTAs, and will soon make recommendations to the incoming government on modifying trade policy. Recommendations are expected to include the removal of inverted duty structures to eliminate cost disadvantages for India-based manufacturers and reservations about India’s inclusion in the Regional Comprehensive Economic Partnership (RCEP).

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For several months now, policymakers in India have been concerned by a slight decline in manufacturing output as industrial production fell by 0.1 percent in 2013-2014 after increasing 1.1 percent in 2012-2013. A course correction on trade policy would seek to discourage imports that have recently posed a challenge to India’s external sector, while boosting domestic manufacturing operations.

In addition to recommendations on trade policy, the finance ministry will soon release a detailed plan for improving business sentiment domestically, spurring economic growth, containing inflation, maintaining price stability, boosting infrastructure development and deepening reforms to the country’s financial sector and foreign investment regime.

Alongside signs that the BJP will soon usher in a period of economic revitalization, however, many in India are concerned about the potential impact of El Niño on India’s economy. Projections from the Associated Chambers of Commerce and Industry of India (ASSOCHAM) indicate a deficit in rainfall associated with El Niño may cause a GDP loss of up to 1.75 percent (around US$30 billion).

While the climatic event is not expected to have a significant impact on manufacturing operations, rising agricultural productivity has historically increased demand for industrial products while a deficit in rainfall negatively impacts demand for services such as trade, transportation, banking and insurance. As a result, El Niño may slightly harm demand for industrial goods in the short-term while the overall impact is expected to be relatively minimal.

As Narendra Modi prepares to take the oath of office as India’s new prime minister next Monday, investors will be watching closely as the BJP’s economic policy takes shape. Emerging from national elections with a rare majority and clear mandate for economic growth, the pressure is now on for the BJP to deliver on its promise.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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