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FDI, the sole bright spot

At $43bn in 9 months, on course to be the best year

Foreign direct investment (FDI) into India may not have grown the 72%—to just under $60 billion—the UNCTAD report said it did in 2015, but going by RBI data, it grew an impressive 16.6% in the first nine months of 2015 and, at $42.7 billion in this period, FY16 could turn out to be the year of the highest FDI flows into India. Given the slowdown in the global economy, one would not have expected too much M&A, but in-bound investment rose a good 24% to $14 billion. Among the sectors that foreign investors bought into were IT & ITeS, automobiles, trading and services such as banking, and insurance. Indeed, several foreign insurers upped their stakes in their Indian subsidiaries. However, the flavour of the season last year were the e-commerce and start-ups spaces which drew in both financial and strategic investors; a report by Grant Thornton notes that private equity (PE) and venture capital (VC) activity last year hit a new high, contributing more than a third of deal value, at a chunky $16 billion—a 30% jump over 2014. While some 600 start-ups are understood to have found capital, albeit of relatively small amounts, there was big money sloshing around. E-retailer Flipkart walked away with $700 million while Snapdeal and Olacabs picked up $500 million each.

The real estate space too is understood to have attracted just over $2 billion and while this may not seem sizeable, it must be remembered that investors have made very poor returns over the last several years given the recession in the sector and the sharp depreciation in the currency. Moreover, many of the rules were restrictive. That has changed now that restrictions on the floor area of 20,000 sq metres in construction and development projects have been done away with, and the minimum capital of $5 million too doesn’t need to be brought in within six months of the business taking off. Given how the government eased FDI norms across some 15 sectors late last year—investments in private banks, for instance, are now fungible up to the sectoral cap of 74%—one would expect many more large global corporations to set up shop in India or expand their operations. However, for annual FDI inflows to hit levels of anywhere close to $100 billion, some large investments would have to flow into sectors such as defence and aerospace. Whether the easier norm—allowing a 49% stake in defence ventures via the automatic route and a higher stake requiring an FIPB nod—are good enough for manufacturers to take the plunge is hard to say. So far, there has been little evidence of any big ticket investments though potentially big alliances—like between the Tatas and Airbus—have been announced. Though FDI is not even a tenth of total investment in the country, for an investment-starved nation, the change in mood is important.

This article appeared in Financial Express on 25th January, 2017.