India has something to cheer, amidst the global slowdown fears. The Ernst & Young's 2012 India Attractiveness Survey says investors view India as an attractive investment destination. In the survey's global ranking, India is the fourth destination for foreign direct investment (FDI) just below the United States, China and Britain. China is the largest competitor of India in terms of attractiveness, according to the survey.
The three most attractive characteristics of the Indian market that attract investors include high potential of the domestic market driven by an emerging middle class, cost competitiveness and access to a highly qualified workforce. The survey estimates that India's rapidly rising middle class would grow from 160 million people in 2011 to 267 million people in 2016.
"India’s domestic demand-driven growth model is acting as a catalyst for attracting foreign investments into the country. Although the ongoing global uncertainty may have prompted global investors to become more cautious, India’s inherent advantages and proven resilience to counter-act macroeconomic challenges generally outweigh these concerns," says Rajiv Memani, country managing partner of Ernst & Young India.
The top five FDI destinations in India are Bangalore, Mumbai, Chennai, New Delhi and Pune. They attract 43 per cent of the investment projects, 34 per cent of the jobs created and 26 per cent of the value of FDI in India.
According to the survey, while India has been one of the leading destinations for shared services, the country is rapidly emerging as a manufacturing location for many foreign corporations. By 2020, 25 per cent of our survey respondents see India among the world’s leading three destinations for manufacturing.
Among the sectors, technology attracted the largest number of FDI projects (146 projects) in the country, followed by retail and consumer products (83 products) in 2011. "India will be the next superpower in application development," says D Shivakumar, MD, Nokia India.
Despite the issues in infrastructure sector, benefits outweigh costs for a majority of investors. Investors also find India an appealing destination for automotive manufacturing given its skilled technical labour, low-cost supplier base and strong domestic demand. Michael Boneham, president & managing director, Ford India, says by 2020, India is forecast to become the world's third largest auto market. and the increasing affluence of the average consumer Indian middle class will be one of the main factors fuelling this growth. In healthcare too, improving R&D capabilities and proving inclusive access to primary healthcare will further improve the attractiveness of the sector, according to the respondents.
The survey also points that private equity (PE) in India has significantly evolved over the last decade. It mentions that 2,000 Indian companies were funded by PE in the last five years and $50 billion was invested from 2007 to 2011. "Despite the ups and downs over the past decade, PE has emerged as a very important investor in India Inc and with the long term India growth story still intact, PE funds continue to look eagerly at investing in India, " says the report.
Although investors believe India has great human capital, they remain concerned about the state of infrastructure, governance and transparency in the country. Seventy six per cent of the respondents say improving infrastructure will have a high impact and is a prerequisite to attract foreign investment. Another 60 per cent of the respondents believe better governance and transparency system will have a high impact on India's attractiveness.
Further, investors also remain unconvinced about the country's capacity as an innovation centre. The survey report calls for improving the quality of its infrastructure and increasing collaboration between academic institutions and corporate world before it earns recognition as an innovation destination. In conclusion, the survey highlights the need for strengthening the industry-academia relationships and improving quality of infrastructure and research laboratories.