The Hindu Business Line : India on the cusp of FDI take-off

ON Wednesday, Mr Bill Gates announced at a press conference in New Delhi that Microsoft would invest $1.7 billion in India over the next four years. A day earlier, chipmaker Intel's Chairman, Mr Craig Barrett, who was also on an India tour, unveiled a $1-billion investment plan for his company in the country.

On the same day, US banker, JP Morgan Chase, said it would hire 4,500 graduates in India for its offshoring service in the next two years.

Two days ago, German automaker BMW signed a deal with the Tamil Nadu Government for setting up an assembly unit with an initial investment of over Rs 100 crore.

Last week, AMD-SemIndia consortium made a commitment of $3 billion investment in a chip making facility in India.

This may be a record. India has notched an FDI commitment of $5.75 billion in a single week. No wonder, global consultancy firm AT Kearney's latest global FDI confidence index has placed India as the second most-favoured destination in the world displacing the mighty US.

The optimism about India is quite evident. A fortnight back, directors of Europe's largest bank, HSBC, flew down to Delhi to hold its board meeting which discussed major investment plans for its India operations.

The chief of German multinational Siemens, Dr Klaus Kleinfeld, who was in Mumbai recently, said the group has identified India as its key growth market for Asia.

A month ago, the UK-based telecom major Vodafone picked up a 10 per cent stake in Bharti Tele-Venture for $1.5 billion in one of the largest equity investments in the sector.

The Finnish company Nokia is setting up a large manufacturing facility for mobile handsets in Tamil Nadu. Motorola, its global rival, is also talking about a $300 million investment in the State.

The South Korea's LG — now a major electronic and white goods brand in India — is also investing in a cell phone project in India. Cisco System, another global major, had made a commitment of $1.9 billion investment.

What is significant is that the foreign investments are not limited to IT, telecom or BPOs. Sectors such as cement, steel, automobile, and infrastructure have also attracted large investments.

One of the first big ticket foreign direct investments this year was the acquisition of a major stake in Associated Cement Companies by Swiss cement major Holcim in January. This was a significant development as it was the large FDI (about Rs 800 crore) in the cement sector after the French company, Lafarge, took over the Tata Steel's cement division in 1999.

Recently, Renault tied up with Mahindra & Mahindra for a car-making project in India and Fiat joined Tatas for exploring overseas opportunities.

The South Korean steel company, Posco signed an MoU with the Orissa Government for an integrated steel project. On the infrastructure front, DP World, the Dubai Government-owned company, became a major investor in Indian port sector following its takeover of the UK-based P&O last week.

The Dubai company will now have controlling interests in five container terminals in India: Kochi, Chennai, Nhava Sheva and Mundra.

Retail is another major area where global majors are eyeing India, though FDI is yet to be allowed in this sector.

The CEO of Wal-Mart made a high profile visit to this country earlier this year and the UK's Tesco is also talking about India plans.

According to news reports, the Government is considering a 26 per cent FDI in retail. Some foreign companies are already operating whole scale cash and carry outlets in India.

All these indicate one thing that India is fast emerging as a major international investment destination.

Analysts call it as part of the `great Indian growth story'. But the growth story has already been told in many words much before the Sensex touched 9000.

The robust economic growth (average 6.5 per cent in the last five years), strong foreign exchange reserves — over $140 billion, and the booming stock markets are no longer news. Investors and analysts have already discounted them.

What, then, is that still keeps the India story alive? Indeed, some undisputable facts: Life in India is fast changing; Indians are growing rich; they are spending more; India as a market is expanding. Close to a third of the 180 million households in the country is `middle-class', whose incomes are rising rapidly.

Given the existing low level of per capita consumption of goods and services, every increase in the income of the middle class translates to a higher demand for goods and services.

This, then, is the key "ticking factor" that propels the Indian market. Also, close to 40 per cent of the population is less than 25 years of age - a group with high propensity to produce and consume. Aspirations are the driving force for this age group.

Beyond all these, India is currently placed in a unique position, which not many developed economies can now aspire for.

The country has the best pool of brains available at the most economic cost. (India has the world's third largest pool of scientists) It has one of the best-regulated capital markets that provide easy access to equity capital.

And, the growing domestic market with large newly rich middle class customers is a paradise for the aspiring entrepreneurs. The combination of these - a unique resource-mix for any business — in a democratic environment where the rule of law is respected, is what makes India one of the best international investment destinations in the world. And that is what keeps the India growth story ticking.

According to Consultants AT Kearney's FDI Confidence Index-2005, India, which has moved up to the second place after China, is expected to get 42 per cent of selected offshore functions going over seas for the next three years as against 17 per cent for China.

PricewaterhouseCooper's global retail and consumer study (2004-05) has recommended India as one of the top destinations for growth opportunities.

The study pointed out that while China shows the most immediate opportunities in the retail and consumer segment, India offers more long-term potential for investment in the sector. Yet, there are red lights in India. The Left parties have been opposing FDI in retail.

The World Bank's `Doing Business in India' report ranked India below some of the Asian countries in certain parameters like the number of days that take for starting a business in India, infrastructure deficiencies, delays in customs clearance and corruption.

Besides, there are FDI caps for some sectors such telecom, insurance, banking and domestic air service. FDI is not allowed in sectors such as agriculture and retail.

As pointed out by Mr Paul Laudicina, Managing Director of AT Kearnery's global business council, "India is on the cusp of an FDI take-off. However, for the country to harness manufacturing investor interests and evolves into an FDI capital-intensive hub, the government must maintain its reform orientation and overcome narrow business interests."

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