Posted by: Pradeep | October 1, 2008

FDI – India can escape the slowdown with some reforms

THE slowing of M&A activity and FDI flows, considering the deceleration of global economy and crisis in the financial services sector, was only to be expected. Given the number of banks and financial institutions facing bankruptcy across the US and now Europe due to their exposure to poor quality assets, Unctad’s estimates in the World Investment Report 2008 that FDI flows in the current year would be only 10% lower at $1,600 billion may be a trifle too optimistic. The compression of demand due to elevated levels of inflation and poor consumer sentiment is already putting pressure on corporate margins, and together with the crisis in the financial sector, the ability of companies particularly in the developed countries to raise resources for investments — be it for M&A or greenfield projects — would be seriously hampered. Asian economies and other developing nations, however, continue to be attractive and may not experience a major slowdown of FDI flows, largely due to intra-regional flows and attractiveness of their markets owning to demographic profile and growing consumerism.
  
In the specific case of India, although trends suggest reasonably good inflows so far, it is a bit early to take a definitive call. That Japanese companies and others from Taiwan and South Korea are considering India as the alternative to China as a place to do business could stand India in good stead. And we may attract the targeted $30-billion in this financial year. India, according to the Unctad report, is the second most preferred destination after China as a place to do business. Bank for International Cooperation from Japan is quoted in the report saying that Japanese MNCs saw India replacing China as the most promising country for longerterm prospects, with the number of companies planning to expand operations in China declining. That should enthuse Indian policymakers. However, for global interest to translate into projects on ground, the country needs to continue reforming and remove impediments to investment. After all, higher rates growth can be sustained only if the country augments its infrastructure; not just transport, electricity and water as the Unctad report says it needs to, but also soft infrastructure such as healthcare, education and skill upgradation as well as infrastructure for agri sector. 

Adapted from TOI

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