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Foreign Funds Flow Freely

FDI flows progressively in India leading to escape from harsher fund crunch

Forget de-coupling theory here. Expectations are that a country that is as closely economically connected as India is to the US and Europe, would be undergoing pain when both these developed regions are tottering on the precipice of one of the worst recessions ever. But that did not come to pass entirely, at least in one aspect — foreign direct investment (FDI).

But that was not the case with the more famous variant of foreign money coming into India — foreign institutional investors (FII). In 2008, when the whole world came into the grip of the global financial crisis, India found no way to escape the mass scale FII exodus. There was no persuading them that their Indian investments were strong and would deliver above-expected returns. The decision by FIIs to leave was taken in order to turn liquid their investments as the money was needed back home to prevent termination of a whole lot of investment companies. The net result was the outflow of $15 billion in FY09 from Indian equity markets that caused the Sensex to crash by over 50 per cent.

But that was short-term, speculative money that was virtually guaranteed to scoot at the very first sign of an impending catastrophe. The more durable of the two, indubitably, was FDI. So, while so-called hot money flew out, those who believed in the strong economic fundamentals of India kept pouring their money into the country. Net effect of that penchant was, despite the adverse conditions, India attracted a significant amount of FDI over a period spanning April 2008 to March 2009 — the exact time when the global meltdown was at its worst. FDI inflow into India rose to $27.30 billion, which was a jump of around 11 per cent as compared the 2007-08 period’s collection of $24.57 billion. The double digit gain was an exemplary achievement as on the global scale, FDI was down 20 per cent in 2008, according to an United Nations Conference on Trade And Development (UNCTAD) study — “Assessing the Impact of Current Financial and Economic Crisis on FDI Flows.”

India as such has been one of the most sought after destinations for foreign investors, but that should not be a surprise for those who know that the country clocked a robust GDP growth of over eight per cent over the 5-year period ending 2007. The achievement was reflected in another UNCTAD World Investment Report 2008, which indicated that India was the second-most preferred investment location after China. In 2008-09 India managed a growth rate of 6.7 per cent.

FDI inflows have been on an increasing trend over time. From just $2 billion reaching India in 1995-96, it has increased to $27 billion in 2008-09. The trend became significant in 2004-05 — of the total FDI (around $ 102.74 billion) that has come to India since 1995-96 till 2008-09, 76 per cent has come after 2003-04 period.

FDI Enticement

Among the most popular destinations for FDI was the services sector (financial and non-financial). It accounts for the highest share of FDI inflow, besides being one of the major contributors to India’ GDP, cornering $5.27 billion between April 2009-February 2009 as compared to $6.61 billion in FY08.

The other sectors which saw the highest rise in FDI between April-February 2009, as compared to FY08 were chemicals (other than fertilizers), telecommunications and automobiles. While chemicals sector has seen FDI jump from $229 million to $599 million, telecommunications has risen from $1.2 billion to $2.4 billion and automobiles grew from $675 million to $1.13 billion.

During the worst times of the global crisis starting October 2008-to-March 2009, saw FDI inflows plummet, contributing only 37 per cent of the total amount in the FY09 period — they have declined by around 42 per cent on a y-o-y basis, while April to September 2008 saw a surge of 137 per cent on a y-o-y basis.

With a cheap labour and availability of top grade human resources and retaining of the growth potential by local markets, India still is one of the favourite destinations for foreign investments. A recent survey by Japan Bank of International Cooperation in March 2009, revealed that India is managing to hold on to the second position in the list of the favourite destinations for Japanese firms.

What is more noteworthy and augurs well for the future is that the inflow tap was open throughout the best of times and the worst of times, with minor hiccups in between, indicating the confidence foreign money managers had in the India story, despite the fact that other countries, both developed and emerging, were falling into an economic quagmire and also in spite of the fact that the then Indian government had not instigated any far-reaching reforms in the economy. Now, much more is expected from the new government, which has a stranglehold on power, and that means FDI flows can only get better.