Despite question marks on its growth story, India still is an attractive destination for foreign investment, a survey conducted by global consultancy agency EY (formerly Ernst & Young) has concluded.

The survey, titled ‘EY India Attractiveness Survey 2014,’ was conducted among 500 foreign investors. It said more than half (53.2 per cent) of the survey respondents were considering increasing their presence in India. Of the respondents who are looking to invest in India, the majority (57.9 per cent) are planning to expand their operations. Of those who are not planning any investment in India, 61.6 per cent of the respondents do not have any short-term or overseas expansion plans.

The survey found India remains one of the top global destinations for foreign direct investment on account of its local labour cost, domestic market and availability of educated workforce. Rajiv Memani, Country Managing Partner at EY India, believes that investors would be consolidating their existing presence in the short run. For the new players, 2014 would be decisive as the election results come in and expectations are formed in terms of sustaining the pace of reforms and deregulation.

“Investors are considering India for both their services and manufacturing supply chain, but for investments to materialise, the environment must be more enabling and measures on other competitive issues, including currency stability and ease of doing business, must be implemented,” Memani said.

Attractive sectors

Technology, media and telecom (TMT) continue to remain the most attractive sectors for the future. Together these three sectors had 21.6 per cent of projects during 2007 and 2012. This group was followed by industrial with 16.6 per cent and business services with 11.4 per cent.

“While TMT will remain the leading sector, investors expect industrials, retail, automotive, life sciences and the consumer products sectors to become more attractive in the next two years. The industrial sector is also likely to grow in importance in the same time period, which is in line with the sentiment from survey respondents indicating that India will be among the three leading destinations for manufacturing by 2020,” the survey said.

It also added that the supply of a large, skilled workforce, an emerging supply base, access to natural resources and Government initiatives would all play a significant role in driving the momentum of India’s manufacturing sector. However, in 2012, the share of service activity increased to 61 per cent but manufacturing declined to 24 per cent. Issues such as poor infrastructure, land acquisition, regulatory hurdles and the slow pace of reforms have hampered manufacturing projects. Despite low project numbers, manufacturing leads FDI in job creation and total capital inflows.

Competition

According to the survey, 70.8 per cent of the respondents found China to remain India’s main competitor for FDI. However, 8.8 per cent of the respondents indicated that new destinations such as Indonesia, the Philippines and Vietnam, were also emerging as competitors.

Ways ahead

The survey recorded that the percentage of respondents responding in the affirmative to the question on whether India would be surpassed by strong competition from more dynamic countries, has come down. In 2012, 11 per cent of the respondents said ‘yes’ to this question, but in 2013, only 5 per cent said ‘yes’.

While India’s strengths including its burgeoning middle-class, growing domestic consumption levels and a skilled workforce, were helping India strengthen its position in the global marketplace, it was increasingly facing stiff competition. “In order for India to continue to compete on this stage and realise its FDI potential, it needs to improve its operating environment and further develop its infrastructure. Other priorities should include boosting production, improving the taxation system, easing FDI regulations and increasing awareness about emerging cities,” the survey said.

(This article was published on January 23, 2014)
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