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Outward ho

In 1991, India stood on the brink of economic bankruptcy. She had reserves equivalent to just a week of our import bills. Today we have reserves which can pay up seven months of imports. In the backdrop of a growing current account deficit, falling GDP growth, rising inflation and depreciating rupee, there is a clear need for inflow of dollars. But the direction is in fact opposite. Over the last few years Indian companies, instead of investing in India are investing globally. Yes, other countries are attracting FDI from India!

Outward ho

Sample these:

•    Jindal Steel and Power is investing USD $2 billion in a power plant in Africa.

•    Aditya Birla Group will spend US $750m to increase aluminium capacity across the world.

•    Reliance Industries is putting US $2 billion in Venezuela. It invested US $4 billion in shale assets in the US and petrol pumps in Africa.

•    Tata Power has projects lined up in Africa, Southeast Asia, Middle East, China and Saudi Arabia.

•    Net FDI by Indian firms abroad was US $7.13 billion in 2012-13.

There is more to follow. In the next 15 years a staggering 2200 Indian companies are expected to invest globally. Worse still, the flow from abroad is likely to thin down. A start of that was the withdrawal of Wal-Mart, which opened its chain store in Punjab, from its partnership with Bharti group.

OMG! Why is this shift happening?

Some reasons for the shift in interest away from India is discernible. Like:

•    Opportunities abroad are less risky and more predictable.

•    The legal process is quicker and law enforcement better.

•    India is going through governance by paralysis and business ethics is the principal casualty.

Little wonder all this is driving away investment from India and compelling Indian firms to look for opportunities globally.

Former Tata boss, Ratan Tata says that in no other country does an investor needs to wait 7-8 years to get clearance for a steel plant. He was obviously referring to Tata’s sufferance at the hands of successive Odisha governments. Another voice of reason, Aditya Birla Group Chairman, Kumar Mangalam Birla, points out that India is the least transparent of the 36 countries that the Birla Group operates in.

Even as Indian firms started investing abroad, the Indian market is proving to be unattractive for foreign firms.

FIIs which invest in short-term financial assets have a relatively easy exit from the markets. In 2013, FIIs pulled out close to US $8 billion from the Indian Debt Market. Being hot money, the withdrawal created panic pressure in the bourses where stock prices tend to crash as it is too big a volume for others to absorb. As the money moves out of India, the casualty is the rupee.

 

Dalliance with FDI

When China opened its economy, it went through the FDI route. It told prospective suitors that they need to invest in her infrastructure and only later will the country open up equity and retail markets. China has been the star performer of the 21st century.

India opened up its equity market through the FII route and the FDI market through the hamburger route. Over time, through a combination of brute force, bad faith and poor luck, we have turned out to be the flawed genius.

We need FDI as our internal capital is turning out to be inadequate for growth. FDIs are long term bets, generating income and  employment through efficiency and scale.  But FDI is looked at with fear. Local players believe that the foreigners will eat away their business due to competition, will create unemployment and will monopolise profitable sectors.

Foreign companies are becoming increasingly sceptical about investing in India. Land acquisition tops the list. If a company wants to invest in land to commence a manufacturing or distribution unit delays are inevitable.

Wal-Mart found it difficult to adhere to the norms of sourcing 30 per cent of its products from small suppliers. Corruption, stringent foreign investment rules, legal hassles and low profits discouraged Wal-Mart in continuing its partnership.

The good news is that Wal-Mart has incorporated a company named Wal-Mart India Private Limited to open its multi-brand retail stores across India in January 2014.  

Some comparisons are in order. More than 70 per cent of Asean countries where Japanese companies operate are making profits while only 40 per cent of these companies in India are making profits.

This movement of investment outwards could severely impact the economy. India’s Current Account Deficit(CAD) was US $190 billion in 2012-13, while total Forex reserves were US $292 billion. A high current account deficit (upto 2.5 per cent of GDP) is a normal feature for countries that are growing fast. India’s current account deficit is close to 5 per cent of GDP, and with the GDP expected to fall further, the signal has turned red for the economy. The reserves are enough to cover only 1.5 times of the current account deficit.  Dollars through FII and FDI investments are critical, as these are used to finance imports, particularly oil and gold. Currently, reserves are just enough to finance about 7 months of imports. India is also importing essential commodities like edible oil: such imports increase prices of basic commodities leading to inflation.

This rising deficit, the depreciating rupee and the falling dollar inflows are the heady cocktail for disaster. With foreign investors withdrawing from India and Indian investors switching to investment in other countries, foreign exchange reserves are becoming smaller.  

 

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