India second best FDI spot, recent dip temporary: Nomura

Despite the recent massive slump in FDI inflows, India remained the hottest investment destination in the world after China, with inflows set to return to the pre-crisis peak levels by early 2012, Nomura India has said. Foreign direct investment (FDI) inflows plunged 25 per cent in April-January to $17 billion year-on-year. The figure was more alarming in January, when it nosedived 48 per cent to $1.04 billion.

Attributing the recent decline to primarily global factors, Nomura India Vice-President and economist Sonal Varma said other emerging markets too, saw a sharp drop in FDI inflows following the 2008 crisis. However, unlike India, they picked up steam after two years.

“Of the $12-billion decline in FDI inflows between 2008 and 2010, around 60 per cent 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, the share of infrastructure in total FDI inflows rose to 24.7 per cent in 2010, from 16.3 per cent in 2007. Manufacturing share rose to 32.1 per cent from 19.6 per cent, despite a fall in the absolute numbers in FY11,” she said in her report.

While overcapacity, credit crunch, fragile growth and increased risk aversion led multinational corporations to curtail investment globally, the environment-sensitive policies pursued appear to have affected the investor sentiments locally, 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 the deteriorating quality of infrastructure, elevated inflation, shortage of skilled labour, rising wage costs and corruption,” Varma pointed out.

Other factors like tax issues (income tax notice on Vodafone), delay in the $9.6-billion Cairn-Vedanta deal and the many corruption cases are also said to be keeping off investors.

Varma said the fall was not as hard as it was being made out as the decline was more of a definitional issue than actual. Quoting an ISID research report, she said under 50 per cent of FDI inflows between September 2004 and December 2009 could be termed as FDI in the purest sense. The rest bore a greater resemblance to volatile portfolio flows; these comprised round-tripping, and private equity/venture capital/ hedge fund related inflows.