Living the Indian dream? The prospects that await foreign investors in India

David Cameron’s expedition to India in February of this year seems to have been perfectly timed and potentially very lucrative. On his visit, the Prime Minister said: “I want Britain and India to have a special relationship… this is a relationship about the future, not [about] the past”.

Beyond the delicate imperial history of the British-Indian relationship, India has had a troubled past concerning FDI (foreign direct investment) even decades after independence in 1947, particularly regarding the retail sector. Last week’s announcement that rules governing sourcing of products and infrastructure investment have been relaxed must be music to the ears of prospective investors.

However, behind the appearance of opportunity, protests took place in India over retail giants such as Walmart entering the country, and small retail enterprises have witnessed the reforms passed with trepidation, concerned that a subtly amended consolidated FDI policy might not prove so positive for the commercial underdogs.

Let’s take a closer look – what is new about the rules governing FDI? These are the three official amendments that have taken place in an effort to change the landscape of FDI in retail:

  • The initial $100m of investment that comes in during the first three years will be dedicated to “back-end” infrastructure, which includes distribution, storage and agricultural produce (the latter being a massive market in the subcontinent). Beforehand, the plan was that only half of the initial FDI would be invested in such industries. Walmart has invested nearly $2.5bn in South Africa, more than $1bn in Brazil, and similar amounts in other developing countries. Therefore such Western companies are right to consider expanding into India with a view of entering the retail market.
  • 30% of procurement must be from regional supplier with assets up to and including $2 million, and more importantly, a supplier can be reserved to a specific retailer even if their assets increase beyond this threshold. Considering that only suppliers with assets up to $1 million used to be assigned to this category, it demonstrates how the government wants smaller and extra Indian suppliers to remain qualified to meet contract requirements with foreign retail companies.
  • Before the reforms were instated, only towns or cities of 1 million inhabitants were fair game to overseas retailers. The modification now dictates that any town or city is adequate “as per the decision of the respective State Governments”. This is the big modification concerning FDI opportunities. The number of places in which foreign investors can finance businesses will (most probably) skyrocket. Though the State Governments might conceivably spurn foreign retailers, it leaves the door wide open for investors to enter into possible ventures.

Retail, however, is not the only target industry for FDI. The Indian ruling party ( Congress, headed by Prime Minister Manmohan Singh) wants FDI in insurance to increase to 49% to boost an economic influx into the market, including pension funds. Nonetheless, resistance comes in the form of the BJP, India’s conservative opposition party, who hope for FDI to be capped at the current rate of 26%.

Opposing FDI might not make sense to a foreign observer (or many an Indian entrepreneur, for that matter). The BJP, during its time in office between 1998-2004, put forward similar FDI proposals, which Congress rejected back then! This perennial political capriciousness is something that foreign investors would rightly consider before entering into any sizeable venture in the bustling subcontinent. The reasons why India seeks insurance FDI is two-fold:

  • Firstly, the Indian economy is developing exponentially. In conjunction with this economic growth comes a newly sanguine approach towards FDI, and so the previously limited investment parameters are now expanded to accommodate for a growing interest in the Indian commercial sector. The advancement of India holds the key to its future trade ties.
  • Secondly, the government seems to have cottoned on to the possibility that FDI influxes might prove more stable and predictable than money that is constantly invested and withdrawn from more variable markets, such as the equity market. India’s debt is currently 5% of the total GDP. After a recent lull in exports, liberalised policies and increased FDI can encourage prospective investors and attract capital – importantly – on a long-term basis.

The insurance sector can be a troublesome industry anywhere in the world, and that of India is a sector that needs a lot of capital to grow significantly.

This is by no means a professional consultation on directing FDI in India, but merely an analysis of the opportunities for growth available in numerous sectors in the blooming and booming India market. Having loosened the belt of FDI policy, the Indian government has created more breathing space for investors to initiate mutually beneficial undertakings.

However, alongside such scope for foreign involvement, some have a ‘David and Goliath’ complex regarding FDI; there is a fear that small Indian suppliers will be overpowered by international brands and retail monopolies, which could spread like wildfire. Whether or not Indian enterprises will get burned as a result is debatable; but the Indian government’s passion for increased FDI in India seems to be a flame that won’t be easily extinguished by any opposition.

By Rohan Pai.

Tags: , , , , , , , ,

Categories: International politics

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