India as an Investment Destination - Opportunities for Tomorrow
Posted in Finance Articles, Total Reads: 680
, Published on 02 November 2015
The rapid expansion of the capitalist system and the encroachment of industrial economies in the orient world 20-25 years ago were seen as the first signs of the rise of a new world order. The tectonic plates are shifting and the East is rising. The growth of India and China in two different yet successful economy has aroused the curiosity of the Western world. China with political centralisation and economic devolution has developed into a highly efficient manufacturing economy while India has evolved into a vibrant socioeconomic ecosphere. That is primarily the reason why India has been receiving huge inflows of foreign investments even when currently the overall economic rating of the country is under stress.
India was forced to open up its gates to the outside world in 1991. But the country felt the surge of globalisation only after the Asian financial crises of 1998 exposed the structural weakness of South Asian economies. Investors were looking for a politically stable, economically robust economy that was cheap to invest into. India was looked at as the new kid on the block and with some conglomerate powerhouses already dominating the Indian market, niche sectors got a lot of foreign capital at a risk premium. The Indian IT industry was already making headwinds in the US and with that Investment started building up in the Indian financial markets.
The growth of foreign investments in India both as direct and indirect route has grown exponentially over the last 15 years. The FDI 2014-15 stood at $ 37.75bn, remarkably greater than $ 4.75bn a decade ago. After the global recession and the sinking of Euro and US capital markets, hot money has also poured in India in the form of FII’s have gone up considerably. This also presents a systemic risk management problem as outflow of capital will also result in violent exchange rate fluctuations. India is on the path to recover from the slowdown and thus presents a lot of opportunities for investors to take a part of the pie. The startup culture is now booming with the number of entrepreneurial ventures coming out in the past year is 5 times that of a decade ago. This presents a unique opportunity for investors to gain above market return and to invest in high risk equity assets.
There is also a major shift towards driving growth in the manufacturing sector. India has been a predominantly services based economy and if manufacturing picks up, the services industry will be pushed up further by the cascading effect. Norms for investment in different sectors are being relaxed to accommodate foreign players. Also a general policy of divestment is being followed by successive governments which is a long term move away from government controlled business. As such, that will create a vacuum to be filled by both Indian and foreign players. Technology and Infrastructure are the sectors where foreign investment could be a game changer.
The Indian economy has responded well to the foreign inflow of capital. Some sectors however, have performed above expectations and have become the flag bearers for foreign investment. Technology sector has seen a drastic appreciation by foreign investors with the highest share of FDI in India at about 23% to the sector. India brewed IT firms like Infosys, TCS and Tech Mahindra enjoy a high portfolio investment factoring directly into their stock valuations. Now with new technologies coming up and these companies gearing up for a shift from service based to product based offerings, the scale and in turn the bottom-line of the sector is expected to go north. This in turn will lead to an aggressive increase in the capital inflows. The e-commerce industry is already experiencing such a flux with companies that have existed for less than 4-5 years, still have cash flows in negative, raising foreign capitals in millions with relative ease. So with the economy on the track of improvement, the technology sector is expected to burgeon on the back of strong capital inflows, both domestic and foreign.
Infrastructure is another sector where India presents huge investment opportunities. The appetite of the country for highways, ports, airways, electricity is huge and growing. India required around US $ 1 trillion in the 12th five year plan (2012- 17) to fund infrastructure growth. A global survey by Ernest and Young has ranked India as the most attractive investment destination followed by Brazil and China. This presents a huge opportunity for foreign investors to take part in a long term high yield business.
Prime Minister Narendra Modi himself has shown great support for infrastructure improvement across the country. The administration, which has a backlog of more than $100mn of stalled projects, plans to spend more than $ 20mn this year on infrastructure. Moreover, capital requirements have been reduced for private airport developers, GOI has agreed to pay 40% of public private highway development. Many major steps are being taken to improve ease of business in the country. A lot of focus has been made in recent months to improve the investment environment in India. An array of steps have been taken to provide an uplift to the image of India as an investment destination in Infrastructure.
The efforts of the government are rooted in the fact that there are huge gaps in the supply and demand when it comes to Infrastructure. In some cases the conditions are getting worse. The Power sector is facing a major crisis and requires huge investments. Similarly highways and ports are currently in dire state in some places and require major investments. Airways, Railways, Digital Infrastructure, Sanitation all require substantial fund in order to pull them out of this gloomy situation. This may be a grim representation of India’s infrastructure state, but for investors these gaps present huge investment opportunities. The gaps are too huge to be filled by the government alone. Initiatives like Digital India is a signal for all the investors to invest heavily in this domain. Similarly, other areas like power sector, highways present lucrative opportunities for the investors to be a part of the growth trajectory of India while increasing the bottom-line for themselves.
India has been a favourite destination for investors for quite some time now. Even today when economic scenario has been clouded by the gloom of slowdown and territorial conflicts, India remains one of the few bright spots. India provides investors with a market, a robust democracy, stable environment and an opportunity to grow at a fast pace. A relationship of symbiotic nature can evolve considering the opportunities that India as an investment destination provides and the purpose of investment that capitalists can bring in. Some of the glitches do remain and some of the red tape still needs to be cut down. Thankfully Indian government is working to remove these hiccups in a proactive manner. All these factors show that India is a market with excellent opportunities for all the investors out there in the global market. A market where investors can invest, grow and contribute to the country as well.
This article has been authored by Saurabh Pandey from XLRI Jamshedpur
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