FDI in India to surge in next decade

London 3 February 2011: Foreign investors see the huge long-term growth possibilities that India presents according to Ernst & Young’s first Indian Attractiveness Survey. Foreign direct investment (FDI) data shows that India is still in recovery mode from the drop off in inward investment reported in 2009 following the global financial crisis. With the slowdown in global investment flows, the number of FDI projects in 2010 remained constant compared to 2009 at around 750.

Although project numbers and jobs created are still some way off the heights reached in 2008, when there were 971 projects, the long term trend over the last decade shows a consistent, if not dramatic upward movement. Overall project numbers in 2010 were up 60% on 2003 and the number of jobs created up by 30%.

The growing corporate interest in India is explained not only by the country’s economic growth potential, but also by perceptions about how the country will change as its GDP grows over the next decade. In late 2010 Ernst & Young interviewed more than 500 global business leaders about the potential of the Indian market. A large majority believe that, as early as 2020, India will become a global leader in education, R&D, innovation, and as a producer of high value-added goods and services.

Seventy-five percent of the global businesses which are already present in India and formed part of the survey indicated that they would expand their operations. The survey confirms that India is undergoing a transition, both in terms of investor perceptions of its market potential, and in reality.
Rajiv Memani, Country Managing Partner at Ernst & Young India said “With economic growth GDP projected to surpass 8% annually and the number of people in the Indian middle class set to treble over the next 15 years, with a corresponding impact on disposable income, domestic demand is expected to grow exponentially. India’s young demographic profile also helps it provide an increasingly well-educated and cost-competitive labour force. These factors put India in a good position to attract an increasing proportion of global FDI.”

Where the investment has historically come from
The relative decline of the United States as a source of FDI in India appears to have continued in 2010: the number of US FDI projects in 2010 (206) was the lowest since 2003 and almost half the number in 2006, which was the peak of recent years.
The other top ten investor countries that experienced declines in 2010 compared to their medium-term averages (for 2003-10) were France and the UK, which declined by 21% and 3% respectively. Among the other major European investors, German and Italian investment showed a stronger performance in 2010 in terms of number of projects – growing, respectively, at 25% and 27% higher than their medium term averages. This enabled Germany to overtake the UK in the ranking of leading investor countries in India, and perhaps is a reflection of Germany’s stronger recovery from the global recession. However, both Germany and the UK were overtaken by Japan, whose companies started 50% more FDI projects compared to the medium-term average.
In terms of potential new long-term trends identifiable in the interim 2010 data, perhaps the most significant is the rapid growth of China (and, to a lesser degree, the United Arab Emirates – despite Dubai’s financial problems in 2010) as an investor in India. The 19 projects initiated by Chinese companies in 2010 was dramatically more than the seven implemented in 2009, and represented an increase of 92% compared to the medium-term average. With this, China jumped from being the 16th largest investor in India in 2009, in terms of projects, to the ninth largest in 2010.

Sector attractiveness 
Although software and IT services is still the largest sector in terms of FDI projects and jobs, compared to the medium-term average it experienced the largest and second-largest sectoral declines in the number of FDI projects and jobs, respectively. Yet it is still perceived to be the most attractive industry by 31% of executives interviewed. However, sectors such as automotive, consumer products, and infrastructure are now also major motors of the economy and draw significant FDI as demand-driven market expansion in increasing their attractiveness which is reflected in their growth rates.
As well as the increase in these sectors there has been a sharp rise in investment healthcare (209%), Space & Defence (180%), Plastics (142%), Renewable Energy (105%) and Medical Devices (87%) demonstrating the diverse opportunities that India has to present to foreign investors.
In terms of business activity manufacturing attracts the most FDI projects in India and the country is now also emerging as a hub for manufacturing export, particularly in sectors such as automotive. This is followed by sales, marketing and support, business services, design, development and design. The number of FDI projects in the electricity industry showed the highest annual rate of growth, while the number of projects in shared service centers experienced the sharpest decline.

Competitors
According to the survey respondents, the main competitors of India in terms of business appeal are China (60%) and Brazil (9%) among the rapid-growth markets and USA (17%) and Germany (9%) among the developed countries. The size of the internal market and accessibility of customers are perceived as the most differentiating competitiveness advantage. However, with GDP expected to grow and more readily available disposable income for the middle class, the most important characteristic of the Indian market, as cited by 55% of survey respondents, is the high potential of the domestic market.

Outlook is bright 
The outlook for India is bright and it is not surprising that half of all the survey respondents and 75% of those already present in India are increasing operations there by expanding facilities or headcounts. However, in order to enhance its attractiveness, India needs to focus on expanding its infrastructure, making high-quality education available to more people and continuing with business-friendly national and state-level policies.
Farokh Balsara, Markets Leader, Ernst & Young India says, “The strong potential of its domestic market enabled India to deliver a resilient performance during the global economic slowdown. It is today emerging as a manufacturing destination, both for the domestic and global markets. As business leaders compete for growth in the new economy, there is a sense of urgency among our survey participants to seize the prospects offered by the Indian market. This survey is designed to support both business leaders in their investment decisions and the government in providing an enabling environment to accelerate growth.”

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