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FDI flow still recovering: E&Y study

BS Reporter  |  Mumbai 

Survey shows project numbers the same as last year, US contribution falls.

Foreign Direct Investment (FDI) data shows India is still in recovery mode from the drop in investment reported in 2009 following the global financial crisis.

The number of FDI projects in 2010 remained constant compared to 2009, at around 750, said Ernst & Young’s Indian Attractiveness Survey.

However, although project numbers and jobs created are still some way off the heights reached in 2008, when there were 971 projects, the long-term trend over the last decade shows a consistent upward movement. Overall project numbers in 2010 were up 60 per cent on 2003 and the number of jobs created were up by 30 per cent.

In a Ernst & Young survey of more than 500 global business leaders, a large majority believe that as early as 2020, India will become a global leader in education, research and development, innovation and as a producer of high value-added goods and services. Rajiv Memani, country managing partner at Ernst & Young India, said, “With growth in GDP projected to surpass eight per cent annually and the number of people in the middle class set to treble over the next 15 years, with a corresponding impact on disposable income, domestic demand is expected to grow exponentially. India’s young demographic profile also helps it provide an increasingly well-educated and cost-competitive labour force. These factors put India in a good position to attract an increasing proportion of global FDI.”

Relative shifts
The relative decline of the United States as a source of FDI in India appears to have continued in 2010, as the number of US projects in 2010 (206) was the lowest since 2003 and almost half the number in 2006, the peak of recent years.

The other top 10 investor countries that experienced declines in 2010 compared to their medium-term averages (for 2003-10) were France and the UK, which declined by 21 per cent and three per cent, respectively. Among the other major European investors, German and Italian investment showed a stronger performance in 2010 in terms of number of projects – 25 per cent and 27 per cent higher than their medium term averages.

This enabled Germany to overtake the UK in the ranking of leading investor countries in India, and is perhaps a reflection of Germany’s stronger recovery from the global recession. However, both Germany and the UK were overtaken by Japan, whose companies started 50 per cent more FDI projects compared to the medium-term average, said the survey.

The 19 projects initiated by Chinese companies in 2010 was dramatically more than the seven implemented in 2009, and represented an increase of 92 per cent, compared to the medium-term average. With this, China jumped from being the 16th largest investor in India in 2009, in terms of projects, to the ninth largest in 2010.

Sectoral change
Software and information technology services is still the largest sector in terms of FDI projects and jobs, compared to the medium-term average. These experienced the largest and second-largest sectoral declines in the number of FDI projects and jobs, respectively. There has been a sharp rise in investment healthcare (209 per cent), space & defence (180 per cent), plastics (142 per cent), renewable energy (105 per cent) and medical devices (87 per cent), demonstrating the diverse opportunities that India has to present to foreign investors. The percentage of survey respondents who feel the main competitor for India among rapid-growth markets in terms of business appeal is China is about 60 per cent; nine per cent say Brazil. Among developed countries, around 17 per cent say the US and nine per cent say Germany.

The size of the internal market and accessibility of customers are perceived as the most differentiating competitiveness advantage. However, with GDP expected to grow and more readily available disposable income for the middle class, the most important characteristic of the Indian market, said 55 per cent of survey respondents, was the high potential.

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First Published: Wed, January 26 2011. 00:17 IST
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