Mumbai: Nomura India has said despite the recent massive slump in FDI inflows, India remains the hottest investment destination in the world after China and inflows will return to the pre-crisis peak levels by early 2012.
Foreign direct investment (FDI) inflows plunged 25% in April-January period to $17 billion year-on-year. The figure was more alarming in January when it nosedived 48% to $1.04 billion.
Attributing the recent decline to primarily global factors, Nomura India vice-president and economist Sonal Varma said following the 2008 crisis, other emerging markets too saw sharp drop in FDI inflows but picked up steam after two years unlike India.
“Of the $12-billion decline in FDI inflows bet%een 2008 and 2010, around 60% was due to weak inflows into service spaces like computer software and hardware, financial services, banking, and construction,” Varma said.
“The sharp drop in inflows into banking and other financial services is unsurprising as the crisis led firms to restructure operations.
As a result, share of infrastructure in total FDI inflows rose to 24.7% in 2010 from 16.3% in 2007 and that of manufacturing rose to 32.1% from 19.6%, despite an fall in the absolute numbers in FY11,” she said in her report.
While globally, overcapacity, credit crunch, fragile growth and increased risk aversion led multinational corporations to curtail investment, locally, the environment sensitive policies pursued appear to have affected the investor sentiments, she said.
“Delay in framing a land acquisition law has also hurt. In addition, the country’s cost-competitiveness may have taken a hit due to deteriorating quality of infrastructure, elevated inflation, a skilled labour shortage, rising wage costs and corruption,“ Varma pointed out.
Other factors like tax issues (income tax notice on Vodafone), delay in $ 9.6-billion Carin-Vedanta deal, many corruption cases are also said to be keeping off investors.
Shedding some fresh light into the fall, Varma said in fact the fall is not as hard it is being made out to be as the decline in more of a definitional issue than actual.
Quoting an ISID research report, she said, under 50% of FDI inflows between September, 2004 and December, 2009 can be termed as FDI in the purest sense.
The rest bear a greater resemblance to volatile portfolio flows, these comprise round-tripping, and private equity/venture capital/ hedge fund related inflows.
“For instance, only 13% of inflows into realty and construction can be termed FDI, which helps explain why measured FDI inflows into this sector dropped sharply after the crisis,” she added.
Mauritius, Singapore, US, Britain, the Netherlands, Japan, Germany and the UAE are the major investors here.
In April-January 2009-10, $ 22.9 billion flew in as FDI. In FY10, it declined to $ 25.88 billion from $ 27.33 billion in the previous fiscal. The sectors that attracted FDI include services (financials and non-financial), telecoms, housing, realty, construction and power during this period.
Apart from the services, said Varma, the other areas that saw sharp dip include realty, infrastructure and manufacturing, with the deepest fall being into the real estate space.
At present, share of FDI as percentage of GDP is a measly 2.5% in the country. With a view to increase this, and to discourage hot money inflows by way of FII funds, government recently scrapped a set of cumbersome norms that entailed the foreign partner first getting the NOC from his domestic JV partner if it wanted to enter into a similar business with a new partner.
The RBI is also planning to set up a panel to find out the reasons for the FDI slowdown and suggest ways to encourage it.
“Looking ahead, we believe that the current decline in FDI is temporary. According to the Institute of International Finance, FDI inflows into EMs will rise by 11.4% in 2011, while an Untcad survey ranks India as the second top-priority host economy for FDI in 2010-12 after China, she said.
“Still, policymakers cannot be complacent. Reducing procedural and infrastructural bottlenecks and encouraging FDI into the hitherto closed sectors will be just as important,” she added.
According to a recent RBI report, since December 2008, FDI have grown from $125.2 billion to $ 198 billion in December, 2010, while portfolio investment, both in equities and debts, jumped from $ 91.6 billion to $ 171.7 billion during the same period.
Growing from December, 2008, FDI stood at $ 145 billion in June, 2009, and increased to $ 167 billion in December, 2009. It further grew to $ 178.3 billion in June, 2010 and to $ 198 billion by December, 2010, said the RBI.
In sharp contrast, portfolio investment increased to $ 95.9 billion by June 2009 and jumped to $ 117.2 by December, 2009, which again sharply surged to $ 135 billion by June, 2010 before touching $ 172 billion by December, 2010.