The Hindu Business Line : Why India is an FDI magnet

India is on the crest of the Foreign Direct Investment wave. FDI flows into India trebled from $6 billion in 2004-05 to $19 billion in 2006-07 and are expected to quadruple to $25 billion in 2007-08. By AT Kearney's FDI Confidence Index 2006, India is the second most attractive FDI destination after China , pushing the US to the third position. It is widely believed that soon India will catch up with China. This may also happen as China attempts to cool the economy and its protectionism measures that are eclipsing the Middle Kingdom's attractiveness. With rising wages and high land prices in the eastern regions, China may be losing its edge as a low-cost manufacturing hub. India seems to be the natural choice.

India is emerging a significant manufacturer, especially of electrical and electronic equipment, automobiles and auto-parts. During 2000-2005 of the total FDI inflow, electrical and electronic (including computer software) and automobile accounted for 13.7 per cent and 8.4 per cent respectively. Services (including banking and non-banking) and telecom are also attracting foreign investors. During 2000-2005, they accounted for 8.6 per cent and 8.5 per cent respectively of the FDI flows. The FDI surge in the services sector was thanks to the liberalised policy in the banking space, while the consumer boom opened the dam in telecom and automobile.

The key players

Americans were the biggest investors in electrical and electronic equipment directly or indirectly (that is, via subsidiaries in Mauritius), accounting for over 60 per cent of investments in this field in 2000-2005. The flow has far from abated. For instance, IBM plans to treble investment in India by pumping $6 billion. Intel's multiplayer investment plan for expansion totals $1 billion. Dell is to invest $30 million to set up a unit to cut shipment and production cost.

India emerged the world's fastest growing market for mobile telephones, adding as it does about 6 million subscribers every month. The total number of subscribers is expected to reach 250 million by 2007, from 98 million in March 2006. Little wonder that world's top five mobile handset manufacturers — Nokia, Motorola, Samsung, Sony Ericsson and LG — have set up manufacturing facilities in India.

India will be the second largest market for electronic hardware by 2010. Multinational Corporations have committed $18 billion in electronics, IT and telecommunication, according to India Brand Equity Fund (IBEF). In telecom manufacturing alone, about $2 billion is expected by 2007.

In services sectors, the lead players are the US, Singapore and the UK. During 2000-2005, the total investment from these three countries accounted for about 40 per cent of the FDI in the services sector. In automobiles, the key player is Japan. During 2000-2005, Japan accounted for about 41 per cent of the total FDI in automobile, surpassing all its competitors by a big margin.

Why did India shine?

India's vast domestic market and the large pool of technically skilled manpower were the key attractions for the foreign investors. Hitherto, known for knowledge-based industries, India is emerging a powerhouse of conventional manufacturing too. The manufacturing sector in the Index for Industrial Production has grown at an annual rate ofover 9 per cent over the last three years. Global leaders such as ABB, Honeywell and Siemens in electrical and electronic products;Toyota, Suzuki, Nissan, Ford and General Motors in automobiles; and Degrees in specialty chemicals have set up shop in India thanks to the country's skilled manpower.

Happily, alongside FDI, domestic investments are also surging. India Inc raised large resources from domestic and overseas sources. According to Bloomberg data, in 2006, the funds raised amounted to $53 billion through the equity and debt routes; this was 66 per cent higher than in 2005.

After manufacturing and services sectors, the next booming sectors are realty and construction. The real-estate sector is expected to grow at a CAGR of 33 per cent and reach $50 billion by 2010, from $12 billion in 2005, according to a KPMG survey. The factors building up real-estate prices are IT and knowledge industries and the organised retail trade. With the FDI policy in real-estate sector liberalised, several foreign developers have entered the country in tie-ups with local players.

The realty boom has led to a spurt in construction activity. In 2006 , after computer software, telecommunication and financial sectors, the construction industry was the fourth major recipient of FDI. The Indian consumer market is riding the crest of a boom. It topped the 2006 AT Kearney Global Retail Development Index. Currently, the market is estimated at $350 billion and is growing by 13 per cent a year. A McKinsey Survey forecast that India would be the fifth biggest consumer market in 2025, surpassing Germany.

Time for reaping riches

It is payback time for the American firms. According to the American Chamber of Commerce in India, the majority of US firms in India reported double-digit growth, year-on-year. According to BCG (Boston Consulting Group), two American banks - Citibank and Bank of America - are earning more profits in India than their global average. Coke has identified India as the most profitable destination. Surging growth in sales made India the third biggest market for Motorola.

Japanese, after a long cool-off, are upbeat about India. However, they have kept their investments to select fields. During 2000-2005, about 58 per cent of FDI from Japan flowed into the automobile sector. According to a JETRO Survey of Japanese firms in Asean, India topped in the improvement of profits in 2006 and these were attributed by larger sales in the domestic market and improved production efficiency.

Korean auto-makers think India is a better destination than China. Though China provides a bigger market for automobiles, India offers a potential for higher growth, according to the Hyundai Motor India Managing Director. Clearly, manufacturing and service-led growth and the increasing consumerisation makes India one of the most important destinations for FDI.

(The author is Adviser, Japan External Trade Organisation — JETRO, New Delhi The views are personal.)

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