FDI in India

FDI – Astute Conduit for Trade Integration and Sustainable development – 2nd March

Keynote Speech Delivered in the International Conference on FDI Held by Department of International Business, Alagappa University.

R.Kannan, Hinduja Group

Shri. Prof. Subbiah, the Honble Vice Chancellor of the Alagappa  University, Shri.Karunakaran, Secretary to Government of Tamil Nadu, Dr. Narayana Murthy, Member of the Syndicate, Prof. Guru Mallesh Prabhu, Registrar of the University, Prof. Manickavasagam, Dean , Faculty of Management, Prof. UthayaSuryan, Prof.Muthuswamy, Ladies and Gentlemen, Good morning to all of you.

Indian Economy plays a major role in the growth of the world Economy today. Investors across the world are interested in investing in India . In the last four years, the FDI received by India crossed $ 200 bn. The interest of international investors in India is increasing and in Conferences organised by various states, Foreign Investors are committing billions and billions Dollars of investments in the states.

In this context, Department of International Business , Alagappa University is conducting an international conference on FDI, Trade Integration and Sustainable Development. In these two days, apart from the Speakers from Other countries, Experts from India are also participating. Several paper presentations were scheduled during this conference.

I am happy to be part of the programme and look forward to learn new concepts and perspectives on FDI . Am sure , all the participants will benefit a lot from the proceedings.

I would like to Congratulate Department of International Business, Algapppa University in Choosing this important Subject for the Conference and  wish the Seminar a great Success.

Global Economy

Global growth outlook is benign and augurs well for India, particularly for its export prospects. Both the IMF and the World Bank note a tangible improvement in the growth prospects of the US, the Euro Area and Japan. As per the World Bank (Global Economic Prospects, January 2018), global growth is estimated to pick up from 2.4% in 2016 to 3% in 2017 and further to 3.1% in 2018. This recovery is broad-based and largely attributable to a rebound in global investment. Growth in advanced economies is projected to moderate during 2019-20 while that in emerging market and developing economies (EMDEs) is expected to increase further to 4.5% in 2018 and average at 4.7% in 2019-2020. In the Euro area, growth is estimated to improve to 2.4% in 2017 with broad-based improvements across member countries supported by policy stimulus and strengthening external demand. In Japan, GDP growth is estimated to recover to 1.7% in 2017 supported by a recovery in consumer spending and investment as well as the implementation of a fiscal stimulus package but growth is projected to slow down to 1.3% in 2018 as fiscal stimulus is withdrawn and export growth moderates.

Global trade growth is expected to decelerate in 2018, to 4.3% from 4.6% in 2017. Reflecting the broad-based acceleration in the global economy, trade growth picked up in both OECD and non-OECD economies in 2017. According to the Netherlands Bureau for Economic Policy Analysis, export growth was especially strong from emerging markets—where exports grew by 4.8% year on year in January to November, compared with 3.8% export growth in advanced economies. Despite the global economy seeing continued strength in 2018, the global trade growth is expected to slow modestly in line with a deceleration in China's economy, given its outsized role in global supply chains. It is expected that  the authorities' move in 2017 to tighten credit conditions to have a lagged impact on investment and consumption growth in 2018, particularly as regulators tighten controls over household loans.

Indian Economy :

India’s growth prospects have become stronger both in the short and the medium term. Last quarter, the Economy grew by more than 7% , again , becoming the fastest growing Major Economy in the world.  The World Bank has projected India’s growth in FY19 at 7.3% and IMF has projected it to be 7.4%. . The opportunity for India re-emerging as a major contributor for global growth and sustaining this position for many years is the prediction by the leading Economists in the World. India will continue to do well and contribute to the Global Economic growth in the coming years.

Global FDI :

Global flows of foreign direct investment (FDI) had fallen by 16% in 2017 to an estimated US$ 1.52 trillion, from a revised US$ 1.81 trillion in 2016. While FDI in developing countries remained at a level similar to the previous year, more investment in sectors that can contribute to the Sustainable Development Goals is still badly needed. Promoting FDI for sustainable development remains a challenge. FDI to developed countries slumped by (minus) 27%, inflows into developing countries remained stable, at an estimated US$ 653 billion, 2% more than the previous year. Flows rose marginally in developing Asia and Latin America and the Caribbean, and remained flat in Africa. Developing Asia regained its position as the largest FDI recipient region in the world, followed by the European Union and North America.

After three years of growth, cross-border mergers and acquisitions declined in 2017. Their growth had already slowed in 2016, and they went on to contract by 23% in 2017, to US$ 666 billion. However, this still represented the third-highest level since 2007.

FDI to Developing Economies remained Stable at $653 bn, 2% more than the previous year. FDI to transition Economies declined by 17% to $ 55bn. Value of announced Green field projects showed a decline of 32% to $ 571 bn. The number of projects declined by 17%. In developing countries , project values announced halved.

The tax reforms announced by FDI are likely to affect the investment decisions announced by US MNEs, with consequences for global investment patterns. I was attending a meeting on SelectUSAsummit day before yesterday in Mumbai, where US officials want more investments into US from India. At present FDI from India in US stands at $ 12 bn. They feel this can be multiplied several times. They say, they regained their competitiveness through lowered energy costs which off sets the lower cost of labour in China. They had prepared an ambitious plan to revive their manufacturing sector.

In 2017, inflows to US reduced due to reduced inflows from a number of offshore financial centres.  In UK, inflows declined by 90% due to the uncertainty created by Brexit.

Higher economic growth projections, trade volumes and commodity prices would point to a potential increase in global FDI in 2018. However, elevated geopolitical risks and policy uncertainty could have an impact on the scale and contours of any FDI recovery in 2018. In addition, tax reforms in the United States are likely to significantly affect investment decisions by US multinationals, with consequences for global investment patterns.

India FDI

From the year Apr 2000 to Sep 2017 , for which the data is available, India attracted FDI of $ 518 bn including Equity flows, Re-invested earnings and other capital. The FDI equity Inflows alone amounted $ 353.34 bn. In the first six months of this fiscal $ 21.62 bn was received as FDI, which was 17% higher than the previous year. This was a very good growth considering the lower growth for other countries.

The countries which have the leading share in investment of FDI in India in the last 17 years  include ; Mauritius 34%, Singapore 17%, Japan 7%, UK 7%, Netherlands 6% and USA 6%.

The sectors which have received the maximum FDI include , Services sector 17%, Telecom 8%, Computer Software 8%, Construction Development 7%, Automobile 7%.

The States which received the maximum FDI were : Maharashtra 31%, New Delhi 20%,Karnataka 8%, TN&Pondy 7% and Gujarat 5%. Now the states including UP, AP and Telengana are attracting lot of FDI.

Factors Favouring High FDI in India

India will continue to attract very high FDI due to the following reasons.

1.      High Economic growth. All the leading agencies in the world predict that Indian Economy will continue to grow at more than 7% in the coming years and this will exceed Chinas growth rate. High Economic growth rate provides opportunities for high sectoral growth rates.

2.      Rapid Urbanistion of Metros, Cities and even Rural Areas. Due to digitization and penetration of mobile and data services is enabling transformation of Metros, Cities and Villages. Apart from Agriculture, several other opportunities have arisen on account of Digital Revolution.

3. Ambitious development  targets set by the Government for various infrastructure Sectors. The Central Government and State Governments had drawn up ambitious projects in the areas of, Industrial Corridors ( Centre and States ) ,  Smart cities , Port Development, Railways Development, Road Development, Affordable housing Development. This has attracted the interest of Several countries around the world.
4. Manufacturing Mission. India wants to increase the share of Manufacturing from 16% in GDP to 25% in GDP. With this in view, detailed strategies to develop 25 sectors under Make in India Mission were formulated and in the process of implementation.
5. Apart from that Several programmes like Start Up India, doubling Farmers Income, Digitising the nation and several well defined and well thought out development programmes were introduced by the  Government to increase the GDP growth.
6. Now Commerce Ministry has drawn up a plan to look at Industrial Development from Each Districts perspective and District wise Industrial Developments plan would be made.
7. Liberalisation of FDI. The government has lineralised many sectors for FDI. In many sectors today, 100% FDI is allowed. This has attracted the interest of investors across the world.
8. DIPP under the Ministry of Commerce has an Agency called invest India, whose main role to attract investments into India. They have a detailed database of opportunities for investment in India, which foreign investor can use. The data base is organized in terms of Opportunities in States, Sectors and Sub Sectors. There are expert desks created for different countries. In international investments, one of the issue is , availability of information. The Agency plays a major role in facilitating investments.
9. Introduction of  good governance system by government through new regulatory agencies. Indias regulatory agencies are highly regarded by others in the world. When the whole world was under stress, due to prudential policies developed by the agencies, India withstood the global melt down. New agencies were created in many sectors today. This protects the investors as well as customers. This enables a fair competition.
10. Emergence of Several Globally competitive Businesses. In the initial years, only Textile was globally competitive. Now we have many sectors, which are globally competitive. The sectors which have become globally competitive include Automobiles,Telecom, Chemicals, pharma, IT, Gems and Jewellery, R&D, etc. Several more industries will become competitive as we go forward.
11. When large investments are made, it should give good returns. In India, several sectors are profitable because of the large population we have and the large volumes it provide. This is one of the reasons for India’s attractiveness in the Global Scenario. Apart from the large Size, Constant movement of people to higher categories of income from one category at  all levels, creates demand for products at various price points.There is also an increasing propensity to spend  by  people.
12. Competition between States.  Every state in India has drawn up a plan to grow by more than 10%. Every year, they have started holding investment meets where they invite investors from all over the world. In these conferences, the investment opportunities are show cased and MOUs are signed with the potential investors. They sign MOUs with both Indian and Global Companies to increase the investments in the states.
13. Increased  Foreign Investor Interest in  India and India sectors. Considering the big potential for growth, Investors around the world are coming to India and exploring the scope for investments. In the last year, I had met more than 60 Foreign Delegations , which had shown interest in Investment in India. But one concern today is due to increased protectionism, every country wants investments in their own country. This is not going to affect the investments into India.
14. Role of Government AID Agencies /Pension Funds / Mutual Funds and Sovereign Wealth Funds. Japanese Government Agency, JICA in collaboration with JBIC has provided lot of funds projects in Infrastructure sector. Canadian Pension funds in India have invested more than$ 10 bn. Abudhabi SWF has decided to invest $ 1 bn in the  Infrastructure Finance Arm of the Government. There is lot of low yielding funds across the world have to be deployed in attractive investment opportunities and India provides a good scope for deployment of these funds.
15. Part of the Global Value Chain. India has become a part of the Global Value chain in many sectors and many MNEs have set up a part of their operations in India or adopting a strategy of outsourcing from India.
16. Ease of Doing business. India is one of the countries where ease of doing business is within top 10 in the world as reported by AT Kearney FDI investment Index. India ranks 7^th in the Index. If result oriented indicators like Economic growth rate, Growth rate of different industries, profitability, Ease of obtaining finance and number of entrepreneurs created every year , India’s rank should be in top 5. This is one of the reasons, why FDI investments are increasing in India faster than other countries in the world.

India has got one of the highest savings rate in the world. At 30% of GDP and on $ 2.5 trn, our savings in a year amounts to more than $ 750 bn a year.   All of our future investment needs could be met from only domestic sources. But investment pattern of savings is biased towards investment in Real estate and Gold. Accumulated savings in India is very high , which makes India a very strong country for investments.

In Conclusion, India has a highly favourable Eco system for   investments and other countries can not ignore India’s attractiveness and MNEs around the world should look at India for their global growth . The MNEs in India, should draw up aggressive plans for growth in the Indian market and invest more in India. Indian companies should have more participation in global value chains and more Indian companies should go global and manufacture products in India to serve global markets. .Thank you.