Where is FDI headed - services or industry?

Analysts say investors hesitant to invest in industry because of delay in clearances

Services pipped industry in attracting foreign direct inflows during 2000-12 against the first decade of liberalisation, when the secondary sector had drawn double the money from overseas investors than the tertiary sector.

However, the race is still not one sided and analysts say it should not be since the industry, particularly manufacturing creates jobs for larger masses.

Total FDI inflows rose over 10 times to $166.7 billion in 2000-12 from $16.6 billion in 1991-00. FDI to industry kept pace with the total FDI inflows and increased 10 times to $81 billion from 8.1 billion over the period. However, services drew 20-fold FDI at $85.7 billion against $4.1 billion in this period, according to the data released by the office of the Economic Adviser.

As such, inflows in the industries accounted for almost 48.8% of total FDI inflows in both these periods. On the other hand, share of the services sector rose 51.4% in 2000-12 against just 24.7% in the first decade of post-liberalisation period.

Experts feel that foreign investment in manufacturing, which is the largest component of industry, is crucial as this will impact the economy as a whole.

"There is no doubt that FDI is moving more towards services sector. The intent of the FDI was that it will bring more reforms to the manufacturing sector and if it is not happening then it's a concern", said Devraj Singh, executive director, tax and regulatory practice, at Ernst & Young.

Much of the woes for industry in attracting FDI was caused by delay in clearances that various authorities are expected to give. For instance, south Korean steel major Posco is struggling in Odisha for nine years in running now, which itself would have brought $12 billion to take industry ahead of services.

Singh said overseas investors hesitate in pumping money in industries as it involves a lot of capital and that the government has to provide the adequate infrastructure such as power, land, etc.

With setting up of the Cabinet Committee on Investments (CCI) for fast-tracking of clearances for stuck up projects costing at least Rs 1,000 crore, things may move for the industry sector soon, analysts said.

In fact, in 2012-13, of the top 10 sectors attracting highest FDI equity inflows, four were that of services sector - services (financial and non-financial), with the highest investment, telecommunications; computer software and hardware and hotel and tourism.

Recently, the government took a slew of measures to address the current account deficit (CAD) problems. FDI inflows are particularly important for India as it would infuse foreign exchange reserves in the form of dollars into the economy, hence appreciating the value of rupee and would also sort the issue of financing the widening CAD.

Almost all the measures were in the favour of the services sector as changes were brought in commodity exchanges, power exchanges, stock exchanges, asset reconstruction, credit information companies, retail, telecom and courier services. Among a few sectors in which there was a reform and did not belong to services were petroleum and natural gas along with defence production.

The government has also notified its National Investment and Manufacturing Zones to increase share of manufacturing to 25% of GDP from the present around 16% in a decade. However, it has not taken off in a big way so far.

"FDI in services is a good indicator but it should also come in the industries as well. If manufacturing would not grow then it will impact economy, employment and many important things", added Devraj.

However, some analysts were of the view that it does not matter which way the money is flowing.

"I do not see any reason why the FDI inflows should be moving in one direction. Movement in FDI flows is the requirement of the particular sector or industry and is a derivative of the demand and supply in that sector. At the end, it is good to have more foreign investment", said Anil Talreja, Partner, Deloitte, India.

 

Foreign Direct Investment (FDI) inflows in industries and services
	1991-2000		2000-12
	Actual Inflows ($ billion)	Proportion Share of FDI inflows (%)	Actual Inflows ($ billion)	Proportion Share of FDI inflows (%)
Industry	8.1	48.8	81	48.6
Services	4.1	24.7	85.7	51.4
Others	4.4	26.5	0	0
Total	16.6	100	166.7	100