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by Rajen Kumar

No Escaping Social Media

Running a magazine concentrating on issues of small and medium enterprises and managing with limited resources is a like living life on the edge. In this rush of meeting deadlines,...

Special Reports

Apr 2012

EMRC, Brussels Associates with SME WORLD as its New Media Partner

EMRC has promoted business partnerships with the developing world and has organised dozens of business forums in key decision-making cities, such as Amsterdam, Rome,...

SME Worldwide

India’s Magic Formula

Dec 2009

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Looking firstly at inward investment, there can be seen a dramatic rise in the volume and value of Foreign Direct Investment (FDIs) into India over the course of the last five years. According to the Department of Industrial Policy & Promotion, a part of India’s Ministry of Commerce and Industry, the financial year 2005-06 saw a total of $8.9bn FDI equity inflows to India. The following year, this figure had soared to $22.8m, representing a massive 146% rise over the previous year. The level of FDIs continued to rise the following year, with $34.4bn injected into the Indian market (a 51% annual rise) and even in the midst of a global recession, FDIs only dipped by just 2%, with $33.6bn invested in the market.

The UK has been responsible for 8% of FDI into India since 2001

Looking at the geographical source of these funds, the UK emerges as the second most active investor behind the US. Between 2001-09 the UK made a total equity FDI of $5.2bn, representing 8% of total FDI to India over the same period. Given its monolithic status in the world arena you would expect the US to have far outstripped the UK in terms of FDI, but this is not the case. Over the period 2001-09, the US made $6.3bn of FDI into India.

Furthermore, the total value of FDIs is likely to be substantially higher than these figures suggest. The regulations governing investment in India create an obstacle for foreign investors in the form of the Permanent Establishment requirement, which imposes an almost punitive tax burden on foreign companies. It is for this reason that the majority of investors re-route their investment via funds managed in the tax-haven of Mauritius. For the period 2001-09 FDIs from Mauritius accounted 44% of the total FDI in India, a figure of $36.8bn. And you can guarantee that a sizeable chunk of this will have originated from UK investors.

Indian Investment Sector Profile

So where is all this money heading? In terms of the sectors that have historically attracted the highest FDI equity inflows, between 2000-09, the services sector (including both financial and non- financial services) secured a total of $84bn, computer software and hardware $9bn, telecoms $6.3bn, housing & real estate $5.5bn and construction activities (including roads and highways) $5.2bn. This gives a clear picture of India's business landscape, one where high-tech industry has risen in prominence, and has prompted a need for investment in infrastructure, housing and regeneration, and this in turn has engendered a mammoth support services industry.

What makes India so attractive is that, as an emerging market, it promises immense growth opportunities for savvy investors that make inroads in the right sector at the right time. To quantify this, Reuters has calculated that Indian companies have enjoyed an average economic expansion of 8.6% per annum since 2005. And GDP projections estimate a GDP growth of between 4% (according to the World Bank) and 8% (Dr Pronab Sen, India's Chief Statistician). Little wonder that India is being courted by no fewer than 60 international private equity groups, not to mention the 100+ domestic fund managers.

Out of India

India is a prime business destination for foreign companies but what can be said about its own expansionist aspirations?

Nirmalya Kumar, professor of marketing at London Business School has pointed out that as recently as 2001, Indian outward investment was less than $1bn. However, by 2006 Indian outward investment of $10bn had outstripped foreign investment into the country. This continued the following year with Indian companies undertaking $21bn in 40 foreign investment deals in January and February of 2007 alone. Furthermore, Indian foreign investment in the financial year ending March 2007 exceeded the cumulative total foreign investment by Indian companies in the 58 years between its independence in 1947 and 2005.

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