FDI's steady march

The last six months have been disastrous for global economies. Most countries—especially developed industrialised ones—are expected to see their GDP growths shrink to between 0.5 and 1.0 per cent, the first such drop since World War II. While India is no exception— its economy is expected to decelerate from upwards of 9 per cent to anywhere between 5 and 7 per cent this year, according to industry estimates—it has one significant thing going for it: With markets contracting in their home countries, foreign companies are plunging more of their investment capital here.

In other words, much of the world’s loss is turning out to be India’s gain. According to industry statistics, India is expected to close 2008-09 with $28 billion of FDI (Foreign Direct Investment) versus inflows of $24.5 billion during the previous year.

Gopal Krishna, Joint Secretary, Ministry of Commerce and Industry, says: “FDI will continue to flow in countries that offer competitive advantages to global corporations. India not only offers a low cost base but also provides a huge domestic market for consumption.”

This is certainly true for the world’s eighth-largest software maker, Intuit, as well as French defence equipment major DCNS India, both of which set up outposts in India early this year. “We are in India for a long haul. We plan to tread carefully in this market. We will go step by step in the years to come,” says French national Xavier Marchal, Managing Director, DCNS. Essentially, India’s steady FDI growth indicates a high level of confidence among overseas investors. On the other hand, India’s closest rival, China, which normally attracts close to a $100 billion annually, witnessed a drop in its FDI numbers for six previous consecutive months ending March this year.

Unlike China, however, India is uniquely positioned to gain during these bleak times, as the country has a wide variety of sectors recently opened up to foreign players—such as retail, defence and real estate. The services sector—both financial and non-financial—has been a major contributor to FDI in the last few years. Telecom— India’s fastest-growing sector—is a major contributor to India’s FDI pie.

Nokia, India’s biggest MNC, invested $285 million over the last two years in the country and has generated an estimate annual revenue of Rs 25,000 crore. Still, the big question is, can India sustain its FDI growth as the economic woes of the major economies—as well as companies— continue to deteriorate?

Says Gopal Krishna: “We may not see high growth, but that’s also because of a higher base effect.” What also can spoil the FDI story is foreign governments’ policies— especially the US’s—that discourage their companies to invest outside. Nevertheless, companies continue to flock to India to gain an early toe-hold in what is one of the hottest consumer markets in the world, as well as a low-cost manufacturing base.

Brokerage house Edelweiss in its recent report stated that the FDI in India decelerated significantly during the third quarter of 2008-09, but this was not entirely unexpected, because of all the turmoil in global markets.

Moreover, if one considers month-on-month FDI figures, January 2009 was a significant improvement, at $2.73 billion, versus $1.3 billion in December and $1.08 billion in November 2008.

If this trend—and recent foreign investments in various sectors, from defence to auto—are anything to go by, the FDI train is unlikely to derail anytime soon.