Foreign companies in India to expand presence
New Delhi and London, 23 January 2014
India has a strong foothold in investors’ emerging market strategies, despite the recent slowdown in economic activity, according to Enabling the prospects, EY’s 2014 Indian Attractiveness Survey. Of the respondents who have an emerging markets strategy, nearly a fifth said that India accounts for more than 20% of their total capital allocated for the developing world.
- Ease of doing business and greater currency stability is needed to realize potential
According to our survey of 500 international investors, India features prominently in many of our respondents’ plans for the future. More than 50%of the respondents plan to enter or expand their existing operations in India over the next year. The survey indicates that of the respondents who are not planning any investment in India, 61.6% do not have any short-term/overseas expansion plans.
According to the survey, India remains one of the top global destinations for FDI on account of its local labor cost, domestic market and availability of educated workforce.
Rajiv Memani, Country Managing Partner at EY India and EY Global Chair of Emerging Markets, comments:
“In the short-term, we would see the investors consolidating their existing presence in India. 2014 will be decisive for new players as the election results come in and expectations are formed in terms of sustaining the pace of reforms and deregulation. Investors are considering India for both their services and manufacturing supply chain, but for investments to materialize the environment must be more enabling and measures on other competitive issues, including currency stability and ease of doing business, must be implemented.”
The survey highlights that while India captures investor attention it is increasingly facing competition from new markets. China remains India’s main competitor for FDI as both economies are strongly competing to obtain greater share of world trade and investment. However, new destinations such as Indonesia, the Philippines and Vietnam, are also emerging as competitors. The Philippines is competing with India in the outsourcing industry whereas Indonesia and Vietnam are also gaining significance due to their huge domestic market.
The long-term outlook for India is also positive, with investors expecting the country to be among the world’s top three growth economies and among top three manufacturing destination by 2020.
TMT to remain most attractive sector for future
TMT (Technology, Media and Telecoms) was the most attractive sector to investors, from 2007 to 2012, with a 21.6%% share of projects, followed by industrial with 16.6% and business services with 11.4%%. While TMT will remain the leading sector, investors expect industrials, retail, automotive, life sciences and consumer products sectors to become more attractive in the next two years. The industrial sector is also likely to grow in importance in the same time period which is in line with the sentiment from survey respondents indicating that India will be among the three leading destinations for manufacturing by 2020.
The supply of a large, skilled workforce; an emerging supply base; access to natural resources and government initiatives will all play a significant role in driving the momentum of India’s manufacturing sector.
However, between 2007 and 2012, services accounted for 52% of FDI projects, while manufacturing accounted for 31%. In 2012, the service activity’s share increased to 61%, but manufacturing declined to 24%. Issues such as poor infrastructure, land acquisition, regulatory hurdles and the slow pace of reforms have hampered manufacturing projects. Despite low project numbers, manufacturing leads FDI in job creation and total capital inflows.
India priority market for Middle Eastern investors
The US remains the top investor in India. Between 2007 and 2012, the US established 1,505 projects worth US$64.2b. Although investment from the US into India ranges across all sectors, knowledge-intensive industries, such as TMT and business services, receive the most attention. The recent package of reforms initiated by the Indian government has also increased interest in the consumer products and financial services sectors.
Japan and the UK remain the second and third largest investors in India, between 2007 and 2012, with 517 and 505 projects, respectively. Germany, France, Italy and Switzerland are also ramping up their investments in India.
Between 2007 and 2012, Southeast Asian countries initiated 150 projects in India worth US$12b, creating 56,423 jobs. Singapore was the largest investor followed by Malaysia and Thailand.
India is now on the list of priority markets for Middle Eastern investors. This is evident from the 123% year-on-year increase in project numbers between 2011 and 2012. The UAE is the leading Middle Eastern investor in India. It initiated 173 projects in the country between 2007 and 2012, worth US$16.6b.
According to the survey, only 5% of respondents believe that India will be surpassed by strong competition from more dynamic countries compared with 11% in the 2012 survey. While India’s strengths such as the burgeoning middle class, growing domestic consumption levels and a skilled workforce are helping India to strengthen its position in the global marketplace it is increasingly facing stiff competition. In order for India to continue to compete on this stage and realize its FDI potential, it needs to improve its operating environment and further develop its infrastructure. Other priorities should include boosting production, improving the taxation system, easing FDI regulations and increasing awareness about emerging cities.
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