Taxation, infra hurdles will hurt FDI: EY survey

Low labour costs and size of domestic market in India its most endearing features

EY’s India Attractiveness Survey-2014, released on Thursday, shows that though the country stays attractive to investors due to its traditional strengths such as cheap labour, its taxation and infrastructure are posing major challenges.

EY’s last such survey was in 2012. The 2014 survey, which polled 502 global executives from companies with international presence, showed the majority of respondents were considering increasing their presence in India.

However, of the 502 respondents, 160 are not planning any investment in India, compared with only 61 of the 382 respondents in the 2012 survey.

“This growing reluctance to invest has been partly caused by regulatory hurdles, a lack of adequate infrastructure and policy inaction. In most cases, investment is deferred until after the 2014 parliamentary elections. This approach gives them time to analyse the consequences of ongoing reforms,” said the 2014 survey.

Of the respondents in the survey who had an emerging market strategy, nearly a fifth said India accounted for more than 20 per cent of their total capital allocated for the developing world. India was the fourth largest recipient of FDI globally in terms of projects started in 2012. In the first nine months of 2013, foreign investment projects declined by 465 compared with the corresponding period last year.

Low labour costs and the size of the domestic market in India are its most endearing features, but constraints have emerged such as the corporate taxation, inflexibility of labour laws, and transport and logistics infrastructure.

Metros continue to attract the most FDI and investors are not able to think beyond Tier-1 cities. Technology, media and telecom were the most attractive sectors for investors with 21 per cent of FDI into India in 2007-12 coming into these sectors.

West Asia and southeast Asia are giving the traditional sources of FDI in India – US and west Europe — a run for their money.

China continues to be India’s main competitor for investment, but new destinations such as Vietnam, Malaysia and the Philippines are snapping at India’s heels.