India Still 2nd Best FDI Spot, Recent Dip Temporary.

Nomura India has said despite recent massive slump in FDI inflows, the country remains the hottest investment destination in the world after China and that inflows will return to the pre-crisis peak by early 2012.

Foreign direct investment (FDI) inflows plunged 25 percent in April-January period to USD 17 billion Y-o-Y. The figure was more alarming in January when it nosedived 48 percent to USD 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 USD 12-billion decline in FDI inflows between 2008 and 2010, around 60 per cent was due to weak inflows into services 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 per cent in 2010 from 16.3 per cent in 2007 and that of manufacturing rose to 32.1 per cent from 19.6 percent, despite an fall in the absolute numbers in FY11,” he said in his 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, he 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 USD 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, he said, under 50 per cent 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 per cent 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.”

Mauritius, Singapore, US, Britain, the Netherlands, Japan, Germany and the UAE are the major investors here.

In April-January 2009-10, USD 22.9 billion flew in as FDI. In FY10, it declined to USD 25.88 billion from USD 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 per cent 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. (PTI)

Source : print.dailymirror.lk