Investment In India | "India attracts foreign cash"

By : THE ECONOMIST
Source : http://thechronicleherald.ca
Category : Investment In India

Before foreign investors came to India, its finance minister remarked recently, “We did not eat lizards.”

For all the grumbles one hears about India’s economy, there is hardly a sense of desperation. Those foreign investors keep coming: On May 1, Vodafone’s boss met the government. Despite a corruption scandal, a price war, a huge retroactive tax claim and wildly unpredictable regulations, the mobile-telephone firm is committed to its $18.6-billion investment in India, even though its value has fallen by perhaps a third since it was made in 2007.

The boss of Ikea also is reported to be meeting the government soon, despite the shabby way the Swedish furniture chain has been treated. Last year the government said that it would open India to foreign retailers, but then changed its mind. Politicians still fear an onslaught of Ektorp sofas. Wal-Mart scares them even more.

Foreign bosses are persistent because India is important. In the year to March 2012, foreign direct investment was about $50 billion — a record, according to Commerce Minister Anand Sharma. It’s proof, he added, that India is one of the world’s best places for foreign firms.

Whether he is right matters. India aims to fund its current deficit mainly by attracting sticky flows of FDI. Unless oil prices slump, the deficit this fiscal year may balloon to $75 billion, a hefty four per cent of GDP. Already the rupee has fallen, forcing the central bank to intervene.

Based on the past mix of funding India has favoured, it probably needs about $40 billion of FDI a year to avoid a balance-of-payments scare.

Given last year’s buoyant figures, surely India can relax?

No. Those sums seem to exclude exits from India by foreign firms and FDI abroad by Indian groups, such as Tata, which are eager to globalize, or perhaps to diversify away from their homeland. Deduct these items and the net flow of FDI into India last fiscal year was probably less than $30 billion, not nearly enough to justify complacency.

The figures are also lagged, reflecting payments from BP’s investment in oil fields, a deal signed in February 2011.

Worse, FDI may fall sharply. In some ways this is obvious: Indian firms are themselves investing less at home due to red tape, graft and a lack of reforms. The budget threw into confusion the taxation of takeovers by foreigners and the legality of offshore holding vehicles.

Some industries are, in effect, now closed to further foreign investment, notably telecoms due to a corruption scandal, and insurance and retail, where looser rules on outside ownership no longer seem imminent.

The one industry in which the government is eager to attract foreign investment is aviation, since local carriers are floundering.

But global airlines, such as Emirates, don’t seem as interested.

After a decade of booming FDI, a sanity check is due. Balance-of-payments data suggest mediocre returns — a stock of about $200 billion of FDI made profits-after-dividends of $11 billion in the year to March 2011. Assuming a dividend payout ratio of 33 per cent, that implies a roughly eight per cent return on equity, below the cost of capital in India. The central bank expects foreign profits to fall for the year to March 2012.

There are pockets of success. Typically they involve old firms with listed subsidiaries, such as Unilever, Siemens, Holcim and Suzuki. Some foreign outfits have revived under new owners — the candymaker Cadbury under Kraft, for example, and ICI’s paint business under Akzo Nobel. The three biggest foreign banks, Citigroup, HSBC and Standard Chartered, have pedigree in India and do well.

What about newer FDI? Technology firms’ back-office operations such as IBM’s have probably worked out well, though data are scarce.

Some carmakers such as Hyundai have built successful plants in India, partly by picking states with better-run governments.

The overall picture for recent FDI is patchy, however. India’s rough and tumble trips the unwary. On April 30 Adidas, the German shoemaker, said that it would take a charge of as much as $250 million resulting from “commercial irregularities” at its Indian arm.

And it can be hard to escape global trends: Nokia’s Indian sales are a fifth below their peak.

Recent big deals have a bad record. Vodafone’s purchase of its Indian mobile unit was the largest deal ever, and a stinker. The next-biggest, BP’s $7-billion purchase of stakes in the offshore fields of Reliance Industries, faces falling production and reserves. Some analysts think its value has halved. The takeover of Ranbaxy, a generic-drug maker, by Daiichi Sankyo of Japan has been partly written off. NTT DoCoMo’s investment in Tata’s mobile arm has probably fared poorly too.

Some investments have been hurt by the state. POSCO, a South Korean firm, has spent years tangled in red tape as it seeks to build a $12-billion steel plant. Cairn India, an oil firm bought by Vedanta, a London-listed resources firm, was hit by a multibillion-dollar royalties grab that it says breaks a government promise. Several mobile-telecoms firms that used licences awarded in 2008 through a process the Supreme Court has judged illegal may now lose billions.

Is FDI in India over? Of course not. India is still growing faster than economies in the developed world and has vast potential as a manufacturing centre and as a market.

When potential investors hear the horror stories, though, they are likely to think twice.

Unless the government becomes more hospitable, India could face a balance-of-payments setback.

Source : http://thechronicleherald.ca/business/98301-india-attracts-foreign-cash