Mumbai: Many global companies want to expand in India but an unfriendly business environment and uncertainty ahead of the general election are holding them back from investing in Asia’s third-largest economy, according to a survey by EY released on Thursday.
The India Attractiveness Survey 2014 by the professional services firm formerly known as Ernst and Young includes inputs from 502 global executives of companies with international presence in North America, Europe, Asia and West Asia.
More than half of the respondents—53.2% or 267—said they are considering increasing their presence in India and, of them, 119 are planning to expand their operations.
Eighty-six percent considered India’s labour costs as its most attractive asset, while infrastructure, the business environment, foreign direct investment (FDI) regulations and taxation policy were mentioned as the key challenges.
“In the short-term, we would see the investors consolidating their existing presence in India,” Rajiv Memani, country managing partner at EY India and EY global chair of emerging markets, said in a statement.
“[The year] 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,” Memani said.
India will likely hold its national election in April-May.
A negative finding in the EY survey is that 160 companies, or about 32% of the respondents, said they are not planning any investment in India, compared with 61 out of 382 respondents (16%) in the 2012 survey.
This increased reluctance to invest has been partly caused by regulatory hurdles, a lack of adequate infrastructure and policy inaction.
However, in most cases, investment has been deferred until after the parliamentary election, so investors can assess the path of economic policy and reforms under the new government.
In addition, more than 60% of the respondents said they did not have any short-term expansion plans or had no overseas expansion plans at all.
“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,” Memani said.
According to the survey, 70.8% of the companies felt that China is India’s main competitor for foreign direct investment. However, according to 44 respondents, destinations such as Indonesia, the Philippines and Vietnam are also emerging as competitors for FDI.
Around 63.5% or 314 of the participants have an emerging markets strategy and nearly a fifth of them said that India accounts for more than 20% of their total capital allocated for the developing world, especially in the business services sector.
However, these investment plans vary across sectors. Technology, media and telecoms (TMT), infrastructure and financial services companies plan to invest a smaller amount than business services investors, who plan to allocate more than 20% of their emerging market capital to India.
Overall, in 2013, India received 310 projects in the first nine months, a 46% decline from the same period the year before, hurt by global economic uncertainty, wide domestic current account deficit, depreciation of rupee and internal governance factors.
India’s gross domestic product (GDP) slowed to 5% in 2012-13, the slowest pace in a decade, from 6.7% in the year before, as high inflation, elevated borrowing costs and delayed project approvals forced companies to put investments on hold. In the first half of this fiscal year, growth averaged 4.6% as consumer spending also turned sluggish.
In the first nine months of 2013, TMT and industrials remained the top two sectors in terms of project volume, and noticeable investors, mostly from Asia-Pacific and West Asia, showed increased interest in infrastructure—the largest sector in terms of FDI value in the first nine months of 2013.