Money & Banking

India’s outward investments in manufacturing decline: Exim Bank study

Beena Parmar Mumbai | Updated on July 29, 2014

India’s outward overseas direct investments (ODIs) have undergone a considerable change not only in terms of magnitude but also in terms of geographical spread and sectoral composition, as per an Exim Bank study.

In the last one decade, India’s outward investments had increased from $1 billion in 2001-02 to $30.9 billion in 2011-12, it said in a statement.

“In terms of sectoral dispersion, the study points out that it has primarily been the manufacturing sector that has been the favoured choice for Indian ODIs, across most of the last decade, although its significance has gradually been waning. Thus, while the share of manufacturing sector in India’s ODI was 59.8 per cent in 2003-04, its share declined to 31.5 per cent% in 2011-12,” the Exim Bank said.

Within manufacturing, refined petroleum products was the largest category (in terms of cumulative investments), followed by pharmaceuticals, medicinal, chemical and botanical products, and motor vehicles.

Sectoral dispersion

While the sectoral dispersion has remained fairly stable during this period, the notable change has been the emergence of fabricated metal products (except machinery and equipment) and special purpose machinery among the major segments of Indian overseas investments during the latter part of the decade.

The study titled ‘Outward Direct Investment from India: Trends, Objectives & Policy Perspectives’, has also undertaken a primary research on the motives of India ODI which indicates varied objectives, ranging from low labour cost advantages in the host country and saturation of the Indian market to the need to enhance its export-competitiveness in third country markets and to exploit the domestic market potential in other countries.

Survey-based research

However, a clear outcome that emerges from the survey-based research undertaken in the study is that overseas investment activities of Indian companies are motivated essentially by a set of firm-specific objectives and could range from acquisition of brands and technology to securing resources.

Future growth of Indian companies

It also identified that the future growth of Indian companies will be influenced by the share that they can garner in the world market, not only by producing in the country and exporting, but also by acquiring overseas assets, including intangibles like brands and goodwill, to establish overseas presence and to upgrade their competitive strength in the overseas markets.

RBI data indicates that a significant amount of this investment has been going to countries like Mauritius, Singapore, British Virgin Islands and the Netherlands.

The study notes that while in themselves, these countries are neither large enough nor do they have significant domestic markets to warrant the amount of investments witnessed over the years by Indian entities, they do provide considerable amount of tax benefits which make them attractive destinations for onward routing of investments into third countries.

The ultimate destination of investments is not captured in the RBI data and hence may not accurately reflect the extent of the linkages between India and the rest of the world in terms of actual outward investments.

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Published on July 29, 2014
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