India has captured the world’s imagination as its economy has grown at nearly 9 percent a year and a rising consumer class has bought cell phones, cars and homes. No wonder foreign companies are increasingly eager to tap that growth by investing here. Or are they? Despite India’s stunning growth, foreign business and investors have started looking elsewhere. Foreign direct investment in India fell 31 percent, to $24 billion, in 2010 even as investors flocked to developing nations as a group. And in the past two months, foreign investors took $1.4 billion out of Indian stock markets, helping to drive the Sensex of the Bombay Stock Exchange down 16 percent from a record closing high in early November. The index fell 2.8 percent Thursday.The decline in foreign investment highlights the challenges outsiders still face in India, two decades after policy makers started opening the country up to the world. For Indian leaders, the drop in foreign money could make it harder to achieve the faster and broader economic growth that they need to create jobs and pull hundreds of millions of India’s 1.1 billion people out of poverty. While inefficiency and bureaucracy are nothing new in India, analysts and executives say foreign investors have lately been made wary by a highly publicized government corruption scandal over the awarding of wireless communications licenses. Also making them think twice is a corporate tax battle between Indian officials and the British telecommunications company Vodafone that reached Indian Supreme Court.Meanwhile, an inflation rate of 8.2 percent and rising that seems beyond the control of the Indian central bank has done nothing to reassure investors.And multinational corporations initially lured by India’s growth narrative may find that realities of the Indian marketplace tell a more vexing story.Some companies, like insurer Met Life and the retailing giant Wal-Mart Stores, for example, are eager to invest and expand in the country but have been waiting years for policy makers to allow them to expand their operations.Jahangir X. Aziz an economist with J.P. Morgan in Mumbai, said that while Indian policy makers had seemed ambivalent toward foreigners, some other emerging economics had laid out red carpets. Lately, foreign direct investment in countries like Thailand, Indonesia and Brazil has surged. Direct investment in Brazil, for instance, jumped 16 percent, to $30.2 billion last year, according to the United Nations.
“In a world awash with liquidity there are many other places to fish,” Mr. Aziz said.
Prime Minister Manmohan Singh of India said last week that global investor sometimes, not Indian policies, were to blame for the investment decline. But he acknowledged that the country should improve its business climate, and he promised that his government would outline its “reform agendas” in the budget it planned to present Monday.“I do agree that we need to strengthen our resolve to create a favorable environment for larger flow of funds from abroad,” Mr. Singh said.There is no doubt that investors and companies the world over are still placing bets on India’s growth. Last year foreign investors poured $30 billion into Indian stock market, some profit taking from the market’s high last autumn was probably to be expected. And earlier this week, BP announced that it would buy into Indian oil and natural gas fields for $7.2 billion, which would make it the largest foreign investment in the country.But the broader trend suggests that foreign companies and investors are concerned about their ability to do business in India.
Mr. Aziz and other analysts say the slowdown in foreign money is part of a boarder pullback that also includes Indian companies. Private investment as a percentage of the Indian gross domestic product fell to 22 percent in the current fiscal year, from 25.6 percent a year earlier. Analysts say business are being more cautious because they are having more trouble getting regulatory approvals and are unsure about the direction of government policies. So far, that shortfall has been made up by higher government spending and personal consumption, but economists say that these, alone are not ingredients for sustained growth.And despite Mr. Singh’s promises, executives say they fear that he will not be able to persuade other policy makers to make necessary changes, Indian ministers often sidestep the boarder agenda set by Mr. Singh, who crafted India’s first big economic changes in 1991 when he was finance minister.He now heads a fractious political coalition. And recent corruption scandals like the poorly organized Commonwealth Games last year in New Delhi have eroded the government’s credibility.
Privately, business executives complain that Indian officials are adept at proclaiming their commitment to free markets while delaying specific measures to ease restrictions. Doing so is politically difficult in India because many politicians, labor unions and civil society groups prefer government spending and domestic protectionism to further economic liberalization.
In the retail industry, for instance, the country still bars foreigners from owning stores that sell more than one brand of products. That restriction, which is meant to protect India’s many small shopkeepers, prevents Wal-Mart, Tesco and others from selling to India’s growing consumer class. In recent months, Indian officials have sent conflicting signals about whether the government intends to ease that policy. In insurance, MetLife, which has invested $139 million in an Indian company, would like to put more money into the country. But is restricted by rules limiting foreign ownership in insurers to 26 percent, a limit that policy makers set in raise it in a few years, as a result, MetLife, which has already reached that limit, cannot grow as fast in India as it can in Brazil, where it owns 100 percent of its affiliate. Even in China, which also favors its domestic companies, MetLife own 50 percent of its insurance operation.“Our commitment to India is as strong as it ever was,” said Shailendra Ghorpade, MetLife’s chief executive for Europe and India. “However, we would like to see an opportunity for us, and people like us to participate fully in this market.”Foreigners are also increasingly concerned about Indian tax laws.
Vodafone is battling officials who want it to pay about $2.5 billion in capital gains tax on its $11 billion acquisition of an Indian mobile phone company in 2007. Indian officials say Vodafone should have deducted the tax from the money it paid to Hutchison Whampoa of Hong Kong.Vodafone said that no tax should apply because the transaction tool place outside India and that if any tax applied it should be paid by Hutchison. Analysts said Indian officials were dunning Vodafone because Hutchison no longer did business in India.Still some executives say that doubts are being overplayed. Gunit Chandha, who heads Deutsche Bank’s Indian operations, said he would like policy makers to speed up the pace of changes, but he does not think India has become hostile to foreign business despite the recent downturn, he noted, the flow of funds was still much higher than as recently as 2004, when India attracted $6 billion in foreign direct investment. “Sometimes it’s a good idea to open the tap in a calibrated fashion, lest you flood the place and then have to erratically close the tap or clean the mess,” Mr. Chandha said. “You will always have a situation where some would argue you could have done a bit more or a bit faster, as is currently the feeling. But in a democracy like India, a more measured peace is beneficial – Vikas Bajaj
