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Downturn hits EU investment in India

Downturn hits EU investment in India
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First Published: Wed, May 27 2009. 11 41 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, May 27 2009. 11 41 PM IST
New Delhi: The 27-member European Union (EU) is India’s largest trading as well as investment partner. EU investment flows to India gained significant momentum in 2007, doubling to €5.4 billion (Rs35,856 crore now) from €2.5 billion in 2006.
Illustration: Jayachandran / Mint
While Spain was the top investor in Brazil, the Netherlands in oil-rich Russia and the UK in China, it is Germany that brought the highest foreign direct investment (FDI) to India during 2004-07.
Other key investing nations in India are the UK, the Netherlands and France, according to data released by Luxembourg-based Eurostat, the EU statistical office.
German investment in India averaged €883 million a year between 2004 and 2007. In 2004, India attracted €432 million of German investment, which continued to grow throughout the period to reach €1.7 billion in 2007. Germany made up 20% of total EU investment in India during 2004-07, the data showed.
In 2006, FDI from Germany to India was primarily concentrated in real estate, financial intermediation and, to a lesser degree, in mechanical products, and motor and other transport equipment. German multinationals such as Bayerische Motoren Werke AG (BMW), Volkswagen AG, Daimler AG, Bosch Group GmbH, Siemens AG and Deutsche Bank AG have been operating in India.
According to Eurostat data, 2008 saw unprecedented Indian investment in the EU. Indian FDI in the EU soared from zero in 2004 to €2.4 billion in 2008. Outflows from India to the EU had touched €879 million in 2007. India’s Tata group acquired Corus Group Plc. in 2007 and last year purchased the iconic Jaguar and Land Rover brands.
Other Indian companies are also looking at new opportunities in Europe. For example, GVK Group and GMR Group have evinced interest in the Prague airport in the Czech Republic.
“Investments by Indian companies in Europe are mostly strategic in nature. The nature of investment is either aiming at new markets or seeking advanced technology,” said Indian Council for Research on International Economic Relations (Icrier) director Rajiv Kumar.
The picture is not as rosy as it seems. India is not the primary FDI destination of the EU even among the Bric countries (the group of four emerging economies Brazil, Russia, India and China). For example, in 2006, while Brazil, Russia and China received €88 billion, €52.2 billion and €32.7 billion, respectively, of FDI from the EU, India could only attract €12.3 billion.
With the financial turmoil followed by a severe economic crisis hitting the EU, according to Eurostat data, FDI into India declined to €852 million in 2008. In comparison, FDI flows to China (excluding Hong Kong) from the EU reached €4.5 billion and Chinese investment in the EU stood at €100 million.
Kumar believes 2007 was an “exceptional” year and the dip in investments in 2008 should not be a cause for great concern, given the global financial and economic crisis.
“We need to make our investment climate less opaque to attract more investment,” Kumar said.
Experts say this is the right time for Indian companies to look for acquisitions in the EU. “If an Indian company has been looking at positioning itself in the European market, this is a perfect time to do so. Indian companies could eye a small European presence to explore the possibilities and expand their customer base in Europe,” said India executive director Robert Schipper of the Netherlands Foreign Investment Agency, which plays a key role in assisting and consulting Indian companies which intend to reach out to the European market.
“The added bonus is that when growth returns to the world economy, as it inevitably will, you will be ideally positioned to take advantage of it,” Schipper added.
According to the latest Reserve Bank of India monthly bulletin, even during these troubled times, net FDI flows into India remained buoyant at $27.4 billion (Rs1.3 trillion) during April-December, compared with $20 billion during the same period a year ago, reflecting the attractiveness of India as an investment destination.
Gross inward FDI was $31.7 billion during April-February compared with $27.6 billion in the corresponding period of the previous year, notwithstanding the deepening of the global economic crisis.
According to latest available data, FDI was channelled mainly into manufacturing (21.1%) followed by financial services (17.4%) and construction (10.1%).
Net outward FDI from India also continued to remain high at $12 billion in April-December 2008 ($13.1 billion invested in April-December 2007) with net outward flows of $5.9 billion in the third quarter of 2008-09.
Despite the deterioration in international credit markets, Indian companies, particularly in the mineral sector, continued their overseas expansion, raising resources from domestic markets.
The EU and India are negotiating a free trade agreement (FTA) that would include a chapter on investment. This is expected to introduce more predictability in EU-India investment relations, experts say. The next round of FTA talks is tentatively scheduled for July.
The central bank has maintained that even though global financial turmoil led to a significant slowdown in net capital inflows in 2008-09, India will still record modest net capital inflows this year.
The United Progressive Alliance’s victory in the general election is expected to lead to a stable government that wouldn’t be dependent on Left parties for support, increasing India’s attraction for global investors.
“Political stability will be very good for investment prospects. However, due to the economic downturn and weak business sentiment in European economies, the level of investment inflows may not be that high,” Kumar said.
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First Published: Wed, May 27 2009. 11 41 PM IST