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India is now most preferred Foreign Investment destination
By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted October 30, 2006
It is super bumper returns time for stock market investors in India, as Bombay Stock Exchange (BSE) benchmark, Sensex, today touched a historic high - a milestone - by crossing the historic 13,000 mark. The country is becoming the hottest priority for individual and institutional investors. Let's take a look at the foreign direct investment (FDI) situation in India.
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The 1,000-point rise in the stock market that touched the 13,000 level has made investors richer by over $66.7 billion in just six-and-half months. The stock market has risen sharply on the back of fresh buying support from retail investors and mutual funds.
What are the major reasons for the fund-flows into India? The strong earnings growth of India Inc coupled with increasing recognition of India's long-term growth prospects attract more and more investors who are willing to bet long. India's growth drivers are a favorable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation.
The thought on India is changing. This is best proved by the increasing number of countries showing interest to invest in India. Another encouraging factor is that India is considered a stable country for investing in by corporates overseas.
India has displaced US as the second-most favored destination for foreign direct investment in the world after China according to an AT Kearney's FDI Confidence Index that tracked investor confidence among global executives to determine their order of preferences.
The United Nations Conference on Trade and Development (Unctad) has said that India is among the "dominant host countries" for FDI in Asia and the Pacific (APAC).
The investment scenario in India has changed. And the figures say that it is for the better. India attracted more than three times foreign investment at US$ 7.96 billion during the first half of 2005-06 fiscal, as against US$ 2.38 billion during the corresponding period of 2004-05.
For the first six months of this fiscal, the country drew US$ 2.86 billion of FDI and US$ 5.10 billion of portfolio investment through GDRs, ADRs, FIIs, offshore funds and others.
With companies such as Intel, Microsoft, Cisco, Nokia and Ericsson outlining ambitious expansion plans for India, the FDI commitment in the telecom and IT sectors combined have touched $ 18 billion over the last 20 months.
As per the data compiled by the ministry of communications and IT, against 28 companies that outlined their investment plans, 17 have already infused capital. Companies whose units are already operational include Ericsson, Elcoteq, LG, Nokia, Alcatel, EMC and Xenitis.
Six of these companies have committed over $1bn each towards their India operations. This include Cisco's commitment of $1.1bn, SemIndia's $3bn proposed investment, Intel's $1.25bn, Microsoft's $1.7bn, IBM's $6bn, and SAP Lab's $1bn investment.
FDI in India rose by 92 percent during April-July this fiscal to 2.9 billion dollars as compared to 1.5 billion dollar in the same period last year. FDI inflows during July increased by a record 259 per cent to 1.16 billion dollars as against 324 million dollars in July 2005, says the Commerce Minister Kamal Nath.
Finance Minister P Chidambaram said in a recent speech at Stanford University that India would attract 125 billion dollars of foreign investment, particularly in infrastructure, to assist the economy in sustaining a high growth rate. "That is (attracting 125 billion dollars of investment) entirely within our hands to make it happen," he added.
Prime Minister Manmohan Singh had said earlier this month that the Indian economy needed 320 billion dollars of investment for infrastructure development in the next five years.
In a bid to stimulate the sector further, the government is working on a series of ambitious economic reforms. India has divested some of its own powers of approving foreign investments that it exercised through the Foreign Investment Promotion Board (FIPB) and has handed them over to the general permission route under the Reserve bank of India (RBI). The FDI cap for aviation has been hiked from 40 to 49 per cent through the automatic route.
According to highly placed sources India government is working to unveil a policy to allow FDI in stock and commodity exchanges, depositories and clearing corporations. In what signals a change of stance from the previously held view of barring foreign investment in this segment of the financial sector, the finance ministry is at work to finalize a set of guidelines, senior officials said. The level of equity holding, which may be allowed for an overseas investor, may be capped at 25% to start with.
It has established an Investment Commission that will garner investments in the infrastructure sector among others, and plans to increase the limit for investment in the infrastructure sector. Kamal Nath has said that India will try to become a more attractive investment destination for the European business community. He pointed out that while EU is the top investor of the world, an insignificant fraction of its total investments flow into India. The minister's statement on making India an attractive investment destination is important in the backdrop of the report of the India-EU high-level trade group, which has recommended that national treatment should be given to investors in the proposed bilateral trade & investment agreement.
However, the concerns expressed by the National Security Council (NSC) over FDI in "sensitive sectors" by some countries may upset the apple cart. But discrimination against these countries and on companies associated with them would smack of a fossilised approach to security in a globalizing world. There are no long-term guarantees in international relations. Countries that are today seen as "threats" might turn allies tomorrow.
However, the World Investment Report 2006, released in the city by the United Nations Conference on Trade and Development (UNCTAD) indicates that India continues to remain a favorite destination due to strong economic growth - 8 percent plus GDP growth and 36 percent growth in the stock market. Policies such as opening up of the retail industry to single-brand players, permitting FDI in industries like radio and construction and raising the permitted level of foreign ownership in communications also helped India in getting foreign investments.
And with India becoming an attractive destination for IT and telecom, the investment committed span both manufacturing as well as research and development activities. Another area is the domestic real estate sector that may emerge a US$ 50 billion industry by 2010 and prove one of the most attractive sectors for foreign investments.
Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site.
Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.
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