Economic Highlights

New Delhi, 9 July 2012

Economic Gloom

RAINBOW IN HORIZON

By Shivaji Sarkar

India has reason to cheer. Thanks to some joyous words on the economy by the UN Conference of Trade and Development (UNCTAD) World Investment Report (WIR) and global corporates. They envisage the financial system’s stabilisation and flow of foreign direct investment (FDI), notwithstanding, fears of Euro zone’s downslide.

Importantly, India has emerged as one of the major countries with higher investment outflow wherein at least eight large companies have made investments abroad aggregating $ 15 billion. There has also been a rise in overseas Greenfield projects, particularly in attractive industries, metal, metal products and business services.

Add to this, FDI inflows reached $ 32 billion against $ 24 billion a year ago, an increase of 33 per cent. Today, India is fast emerging as the third most preferable investment destination, after China and US, according to a survey of 179 global companies. This has changed the outlook of South Asia whereby larger FDI flows are noticed also in Iran, Pakistan and Bangladesh. The only other countries too have attracted significant FDI volumes are Australia and New Zealand.

Inflows to Europe which had declined until 2010, showed a turnaround while robust recovery of flows to the US continued. In fact, global FDI flows exceeded the pre-crisis level in 2011, reaching $ 1.5 trillion despite turmoil in the global economy. However, it still remained about 23 per cent below the 2007 peak of $ 2 trillion.

Besides, overall the global outlook is considered more positive, not the worst scenario as was being predicted in some quarters, states UNCTAD. True, a severe European crisis could change this. Nevertheless, India has nothing to worry. A Euro crisis could dent its growth but not the overall stability and outlook.

The perception of corporates is that regardless of the present problems, the country is poised to grow. Last year investments in 600 Greenfield projects have risen compared to 422 in 2010. Some big companies like IKEA, Coke etc have announced big investment proposals.

According to UNESCAP’s Chief Economist Nagesh Kumar, the 2011 momentum should continue in 2012. His surmise is based on the first quarter trends of Indian economy and its potential for higher investment. The most positive aspect is the country’s market size, considered one of the largest.

The WIR calls for an enabling atmosphere to achieve this potential. It finds that India’s efforts are in the positive direction as it continues to negotiate for free trade agreements and regional trade agreements.

Another positive aspect is that at the peak of the 20008 global crises, the country did not impose curbs or restrictions of any sort. Most countries across the globe, especially in Europe and US announced many cut backs. The US took steps to withdraw big investments that it had made beyond its shores. In addition, the banking crisis, like the, latest of Barclays in UK, is sending ripples through many economies. But Indian banks are found to be doing better.

Significantly, New Delhi is reviewing many bilateral treaties as they are fraught with risks. Already, some companies like tobacco giant Philip Morris have demanded billions of dollars compensation from Uruguay and Australia on the grounds that the steps taken by these companies had hit its business. Another Swedish company has demanded similar compensation from Germany for its decision to close down nuclear plants.

Pertinently, India’s bid to review bilateral treaties is being seen in positive light. A balanced framework is being adopted to strengthen the country’s development dimension. The proposed FTA with the European Union is also fraught with risks. There are many questions that it raises for the pharmaceutical sector. As this might affect affordability of drugs and medicines in the country.  Ditto, is the case vis-à-vis the automobile sector. Nonetheless, India’s quest for safeguards is being taken favourably by global corporate.

The efforts of Reserve Bank of India to check short-term speculative foreign institutional investments are being considered as a safeguard against portfolio investment. Given that such short-term measures cause upheaval in the local markets and lead to uncertainties. In this light, what is being termed as the crisis at the Indian stock market is being viewed as a step to stabilise the economy. This has increased FDI’s attractiveness. Whereby, it is the present trend would continue during the next two years for India.

Another reason for such optimism is the holding of large cash by corporates world-wide particularly in US and Europe. But, if the crisis continues for some more time in the West, these companies might look for other avenues to invest in, particularly, India’s freer economy. Though, it is feared that China with more aggressive posturing might bag a sizeable party of the global kitty.

Further, the West is also grappling with the problem of trust deficit in corporate governance. Since 2008, a number of large conglomerates have revealed this. Undeniably, this will be the challenge of 2012. Worse, with more skeletons tumbling out of the cupboard, it is shaking the confidence of the people and gives the economy jitters.

In fact, the G 20 discussions, where India has taken a lead, to regulate the financial institutions is expected to ensure international discipline. No matter, such financial profligacy adds to long-term costs, damages the economy and the consequent decisions on FDI.

With India’s scenario considered better than many of its Western counterparts many global players might look towards it in the coming years. It is believed that the country is in a better situation so far as its capacity to address many inter-Governmental problems is concerned. Moreover, the country would hope to gain from its Look East Policy as many future investments might come from South East Asia ---- ASEAN region and East Asia.

Overall, the prospects for India are bright. However, it needs to address some critical issues like inflation, high and multiple taxes and agriculture. If it can address these, growth would not be a problem. Along-side, it has to empower people with more purchasing power, usher in some policy changes and reforms which should take a new meaning. ----- INFA

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