Economic Highlights

New Delhi, 25 June 2011

Flight of Investment

WORRISOME, NO CHEERS

By Shivaji Sarkar

The country today is facing a grim situation viz the economy. Not only is there a lack of investment flow but worse we are witnessing a flight of capital. The fall in growth rate has undoubtedly forced foreign institutional investors to cut down their ventures and at the same time made the Indian companies look for safer havens abroad.

Initially, the investments by Indian companies abroad were viewed as a positive sign. But the latest developments suggest that this could be due to the growing concern among companies about the safety of their investments in their own country.

A recent survey carried out by Bank of America-Merrill Lynch has revealed that India is among the least-favoured investment destinations at minus 20 per cent, the lowest in the past six months. The survey also notes that among the Asia-Pacific investors, India has a minus 3 per cent preference --worse than even Korea at minus 8 per cent.

Importantly, the FIIs have for the first time in nine months reduced their total stake in top Indian companies. The survey finds the FIIs are now giving less weightage to India. They are reportedly weary of the series of arrests of high-profile corporate leaders and politicians found involved in a number of scams.

On the macro-economic front, for months the rate of inflation has been hovering around the double-digit mark. The RBI’s initiative to increase interest rates for the tenth time since March 2010 is also proving a dampener as it is increasing the cost of investment. The growth has shockingly plunged from 9.4 per cent in March 2009 to 7.8 per cent in March 2011.

Over the past few years, the growing ambitions of Indian firms, both big and small, have added a new dimension to the Indian economy. This has been made possible through a reverse flow of resources as outward FDI from companies in India rearing to become global players. As a result some ambitious and daring steps have been seen taken by the Indian Inc lately. Hindalco-Novelis, Tata Steel-Corus, Tata-Jaguar, Suzlon-REpower, Wipro-Infocrossing, United Spirits-Whyte & Mackay are some of the major acquisitions by the Indian corporate abroad.

As per the RBI's data for 2007-08, the total outward investment from the country, excluding that made by individuals and banks, rose by 29.6% to $17.4 billion, largely due to acquisitions. A large part of this was through the equity route. If we consider a sectoral spread of India's investments abroad, manufacturing topped the charts followed by the non-financial service sector.

Earlier, there was an accent on inward flows -- FDI, portfolio investments, joint ventures and collaborations to tap the growing Indian market, and also technology transfers for enhancing competitiveness of Indian firms. Earlier, exports were predominantly the main door to step out towards globalization. However, the scenario is clearly changing.

There is a growing realization that the future growth of Indian companies will be influenced by the share they can garner in the world market by acquiring overseas assets, including intangibles such as brands and goodwill, to establish overseas presence and to upgrade their competitive strength in their markets.

Interestingly, while this looks as a welcome spread of Indian corporate abroad, in reality it is not so. Obviously, the Indians now have an inherent fear that all is not well within the shores of the country. Though nobody has conceded that their move is a reflection of their receding confidence in the country’s system, it is slowly but surely being interpreted as one.

The direction of investment proposals reveals that the US, Singapore, Netherlands, European Union, Mauritius and Britain together accounted for over 60 per cent of proposed outward investments from India. Other destinations include Korea, Sri Lanka, Bangladesh, Fiji and Cambodia and even Cook Islands. If one looks carefully, the process started in 2005-06 with $2.7 billion investment largely in the manufacturing sector.

In addition, the FII shareholding pattern in Indian companies points to a decline in interest in their stocks. This is stated to be a major reason for the continuous fall in Bombay stock sensex. The ICICI Securities recently analysed the pattern for BSE 500 companies. It revealed a gradual decline in FII interest in Indian companies. Interestingly, between March 2009 and December 2010, the FII holding had increased in these top 500 companies from 9 per cent to 13.1 per cent. However, in March 2011 it dipped to 12.6 per cent. The FII data shows a net outflow of Rs 13253 crore (about $ 3 billion). And, during the past month and a half alone it has declined by Rs 5300 crore.

Sadly, the trend is continuing. The Indian companies are carrying out their search for greener pastures. Africa has emerged as one of the major destinations. In the past five years. Scores of companies have bought or invested about $16 billion in a range of businesses in Africa. Among them is Bharti Telecommunications whose $9 billion deal to acquire mobile phone operations in 15 African countries is the biggest investment by an Indian company.

Attracted by cheap labour and land cost, Indian companies are also moving into Africa for commercial farming. Only about 15 cent of the arable land in Africa is cultivated. And many countries, which are food-deficient despite having surplus land, are inviting foreign investors into the agricultural sector.

In India, where farming is dominated by small, family-run holdings, companies are attracted by the possibility of starting large-scale operations in Africa. This is substantiated by Arun Agarwal, head of the African Committee at the Associated Chambers of Commerce and Industry. He explains: “In India there is a problem of land. You cannot get big pieces of land. Whereas, Sudan, Ethiopia Tanzania Mozambique, Senegal, and many others are offering big land on easy terms…”

Today, the fear among fund managers, according to G Banga, CEO of Indiabulls Financial Services, is that India may lose its premium over emerging markets if the Government does not make progress in improving infrastructure and controlling scandals.

The silver lining is that all may not be lost. There are still some foreign investors who are looking towards India. This is so because despite recent domestic rumblings, political risks are considered lower in India as compared to China, Brazil and Russia, considered the emerging markets. The long-term structural factors such as economic growth, demographics and consumption are very much intact here, is an explanation offered by V Khemani, President, Edelweiss Securities.

Therefore, even today many see the thawing of FII investment as being temporary in nature. Will this eventually change? A lot will depend upon on how we deal with the overall concern i.e. deficits of political and economic fronts will coincide .--- INFA