Economic Highlights
New
Delhi, 25 June 2011
Flight of Investment
WORRISOME, NO CHEERS
By Shivaji Sarkar
The country today is facing a grim situation viz the
economy. Not only is there a lack of investment flow but worse we are
witnessing a flight of capital. The fall in growth rate has undoubtedly forced foreign
institutional investors to cut down their ventures and at the same time made
the Indian companies look for safer havens abroad.
Initially, the investments by Indian companies abroad
were viewed as a positive sign. But the latest developments suggest that this
could be due to the growing concern among companies about the safety of their
investments in their own country.
A recent survey carried out by Bank of
America-Merrill Lynch has revealed that India is among the least-favoured
investment destinations at minus 20 per cent, the lowest in the past six
months. The survey also notes that among the Asia-Pacific investors, India has a minus 3 per cent preference --worse
than even Korea
at minus 8 per cent.
Importantly, the FIIs have for the first time in nine
months reduced their total stake in top Indian companies. The survey finds the
FIIs are now giving less weightage to India. They are reportedly weary of
the series of arrests of high-profile corporate leaders and politicians found
involved in a number of scams.
On the macro-economic front, for months the rate of
inflation has been hovering around the double-digit mark. The RBI’s initiative
to increase interest rates for the tenth time since March 2010 is also proving
a dampener as it is increasing the cost of investment. The growth has shockingly
plunged from 9.4 per cent in March 2009 to 7.8 per cent in March 2011.
Over the past few years, the growing
ambitions of Indian firms, both big and small, have added a new dimension to
the Indian economy. This has been made possible through a reverse flow of
resources as outward FDI from companies in India rearing to become global
players. As a result some ambitious and daring steps have been seen taken by
the Indian Inc lately. Hindalco-Novelis, Tata Steel-Corus, Tata-Jaguar,
Suzlon-REpower, Wipro-Infocrossing, United Spirits-Whyte & Mackay are some
of the major acquisitions by the Indian corporate abroad.
As per the RBI's data for 2007-08, the
total outward investment from the country, excluding that made by individuals
and banks, rose by 29.6% to $17.4 billion, largely due to acquisitions. A large
part of this was through the equity route. If we consider a sectoral spread of India's
investments abroad, manufacturing topped the charts followed by the
non-financial service sector.
Earlier, there was an accent on inward
flows -- FDI, portfolio investments, joint ventures and collaborations to tap
the growing Indian market, and also technology transfers for enhancing
competitiveness of Indian firms. Earlier, exports were predominantly the main
door to step out towards globalization. However, the scenario is clearly changing.
There is a growing realization that the
future growth of Indian companies will be influenced by the share they can
garner in the world market by acquiring overseas assets, including intangibles such
as brands and goodwill, to establish overseas presence and to upgrade their
competitive strength in their markets.
Interestingly, while this looks as a welcome
spread of Indian corporate abroad, in reality it is not so. Obviously, the
Indians now have an inherent fear that all is not well within the shores of the
country. Though nobody has conceded that their move is a reflection of their
receding confidence in the country’s system, it is slowly but surely being
interpreted as one.
The direction of investment proposals
reveals that the US, Singapore, Netherlands, European Union, Mauritius and
Britain together accounted for over 60 per cent of proposed outward investments
from India. Other destinations include Korea,
Sri Lanka, Bangladesh, Fiji
and Cambodia and even Cook Islands. If one looks carefully, the process started
in 2005-06 with $2.7 billion investment largely in the manufacturing sector.
In addition, the FII shareholding pattern
in Indian companies points to a decline in interest in their stocks. This is
stated to be a major reason for the continuous fall in Bombay stock sensex. The ICICI Securities
recently analysed the pattern for BSE 500 companies. It revealed a gradual
decline in FII interest in Indian companies. Interestingly, between March 2009
and December 2010, the FII holding had increased in these top 500 companies
from 9 per cent to 13.1 per cent. However, in March 2011 it dipped to 12.6 per
cent. The FII data shows a net outflow of Rs 13253 crore (about $ 3 billion). And,
during the past month and a half alone it has declined by Rs 5300 crore.
Sadly, the trend is continuing. The
Indian companies are carrying out their search for greener pastures. Africa has emerged as one of the major destinations. In the past five years. Scores of companies have
bought or invested about $16 billion in a range of businesses in Africa. Among them is Bharti Telecommunications whose $9 billion
deal to acquire mobile phone operations in 15 African countries is the biggest
investment by an Indian company.
Attracted
by cheap labour and land cost, Indian companies are also moving into Africa for commercial farming. Only about 15 cent of the
arable land in Africa is cultivated. And many
countries, which are food-deficient despite having surplus land, are inviting
foreign investors into the agricultural sector.
In India, where farming is dominated by small,
family-run holdings, companies are attracted by the possibility of starting
large-scale operations in Africa. This is
substantiated by Arun Agarwal, head of the African Committee at the Associated
Chambers of Commerce and Industry. He explains: “In India there is a problem of land.
You cannot get big pieces of land. Whereas, Sudan,
Ethiopia Tanzania Mozambique, Senegal,
and many others are offering big land on easy terms…”
Today,
the fear among fund managers, according to G Banga, CEO of Indiabulls Financial
Services, is that India
may lose its premium over emerging markets if the Government does not make
progress in improving infrastructure and controlling scandals.
The
silver lining is that all may not be lost. There are still some foreign
investors who are looking towards India. This is so because despite
recent domestic rumblings, political risks are considered lower in India as compared to China,
Brazil and Russia,
considered the emerging markets. The long-term structural factors such as economic
growth, demographics and consumption are very much intact here, is an
explanation offered by V Khemani, President, Edelweiss Securities.
Therefore,
even today many see the thawing of FII investment as being temporary in nature.
Will this eventually change? A lot will depend upon on how we deal with the overall
concern i.e. deficits of political and economic fronts will coincide .--- INFA
(Copyright, India
News and Feature Alliance)
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