Economic Highlights

New Delhi, 24 July 2010

Unctad Report

 INDIA, AN ISLAND OF HOPE?

By Shivaji Sarkar

India remains an island of hope in a gloomy world scenario. It has followed the global trend in falling investment flows. But its fall has been restricted and can expect better prospects this year, predicts the World Investment Report 2010 (WIR) of UN Conference on Trade and Development (Unctad).

India has emerged as the major investor in Africa and other world investors look to it as a safe haven. According to Unctad, the world activity is shifting to the developing and transition economies, which attracted half of the global FDI inflows and invested one-quarter of the global FDI outflows. They  are leading the FDI recovery and would remain favourable destinations for it. “Global investors show an ever-growing interest in developing economies. Brazil, the Russian Federation, India and China (BRIC) in particular are bright spots for FDI,” it said.

This is a cautious prediction of a gradual decline in growth process of western nations. Some of them like Belgium, Ireland, Hungary and the Netherlands virtually witnessed a negative trend.  Even the US, UK and Germany are going through a rough patch. The developed economies saw a decline of FDI inflows by 44 per cent to $ 566 billion.

There has been significant downturn in global investment flows with the slight exception of India and China. The global investments have fallen from $ 3 trillion in 2007 to $ 1.1 trillion in 2009. In India it fell by 0.8 per cent whereas in China by 0.6 per cent during the 2008-09.

Global FDI saw a modest but ‘uneven recovery' in the first half of 2010, the report says. It foresees global inflows to reach over $1.2 trillion in 2010, rise further to $1.3-1.5 trillion in 2011 and head towards $1.6-2 trillion in 2012. It would take a robust growth process to reach the 2007 level. The report, however, despite exuding optimism has only indicated a slow recovery provided the economic giants do not falter further.

Stating that the FDI flows to South Asia have encountered their largest decline since 2001 by 17 per cent to $233 billion in 2009, Unctad, however, stated it was also the first to bottom out from the current downturn. Thus while they appeared first to be relatively insulated from the global turmoil in 2008, they were not spared in 2009 but did better than many other developed countries.

India remained in the list of top 10 countries in 2009 to have the highest FDI with inflows at $34.6 billion and outflows at $14.9 billion. It is difficult to comprehend Unctad’s optimism for India. Its 2009 inflows and outflows were far lower than what it had achieved in 2008 – an FDI inflow of $40.4 million and outflow of $18.5 million. Even as the aggregate outflows from South Asia dropped from $17.7 billion in 2007 to $15.3 billion in 2009 with cross-border merger and acquisition (M&A) purchases plunging by a considerably large percentage, India's net cross border M&A sales percentage remained the same from 2007 to 2010, it noted.

It said Indian oil and gas companies, mining companies and increasingly metal firms continued to acquire mineral reserves overseas in both developed and developing countries. It named some of the companies such as Tata Steel, ONGC, Hindalco, Tata Motors and Suzlon Energy as the best performing industries in these parameters.

Making a special note that India is one of the major investors in Africa with $332 million invested in 2006-08, it said FDI outflows are likely to rebound this year, sustained by mergers and acquisition opportunities associated with Indian and Chinese firms' persistent pursuit of natural resources and markets. The Unctad report virtually looks towards Indian investment to boost economies of many fledgling nations.

It is difficult to say whether it is a moment of pride for India because it was not all over a rosy picture even for it. While some deals were completed, many remain under negotiations. Additionally several failed due to restrictive policy measures even as New Delhi introduced streamlining and simplification of administrative processes as part of its ongoing policy support measures to attract FDI. In absolute terms India has shown less capability of investing abroad. In such a scenario, Unctad’s over dependence on India looks a bit strange.

Apparently, the report is aimed at bolstering hopes and morale of the world’s turbulent economies that everything is not lost and developing economies are the best bait for seeing a surge in world activities. The outflows, which are led by transnational corporations (TNC) is a cause for concern for Unctad as those from developing countries like India have a possible detrimental effect. Due to the rapid growth of their outward FDI in the past decade, the share of foreign affiliates in the total employment in the developed country TNCs increased workforce outside the US by an annual rate of 2.7 per cent while in the US itself it came down by 0.7 per cent a year.

However, since more TNCs are targeting India, the scenario may be upbeat. However, Unctad sees a growing protectionism for sustaining the indigenous industry. It is silent on its impact but says this is likely to affect the investment pattern. Whether there would be more jobs or not in India is not predicted.

It said 31 of the new national policy measures globally were towards tighter regulations, which account for 30 per cent of the total, the highest share of such measures noticeable since 1992 when Unctad began reporting these measures. It said these were driven in part by heightened concern over the protection of strategic industries, national resources and national security. 

Warning that the likely reversal of temporary nationalisation in sectors often deemed strategic could result in governments pushing to have privatised companies remain in domestic hands or pressurising investors to keep production and jobs at home, Unctad calls for monitoring the phasing out of rescue packages since “risks of investment protectionism have not disappeared”.

Clearly, India has only partially phased out rescue packages. While it increases profits of domestic companies and leads to more monopolization, its impact on the overall economy is not positive. In many cases, particularly even in its Africa investments, India is lagging behind China.

Though the report comes with an assurance of better prospects next year, the WIR is short of stating that the world is coming out of the crisis. Whether crutches like India, itself a developing economy, would be able to help the world come out of the morass is seemingly a deadly bait. The big question is: Would India be able to stand up to the world’s optimism?

(Copyright, India News and Feature Alliance)