MUMBAI - India, moving from problems of scarcity to headaches of plenty, is
reviewing policies to deal with record inflows of foreign direct investment
(FDI). The government aims to streamline investment procedures and to direct
the incoming funds into areas generating more employment.
The country has overtaken the US to become the second-most attractive
destination for global foreign direct investment after China, according to an
AT Kearney study. Helping to attract funds are changes in the country's
regulatory environment, lifting India to the rank of "top reformer" in South
Asia by the Washington-based International Finance Corporation in its 2008
Doing Business
Report, up 12 places from its 2007 rank. Even so, the country dropped a place
to 32 in the report's ''Protecting Investors'' yardstick.
FDI inflows, the bulk at present going into India's stock markets, are
estimated to form around 10% of India's foreign exchange reserves, which stood
at US$256.43 billion excluding gold and special drawing rights at the end of
October, according to the Ministry of Finance. As a pointer to potential
growth, they remain a fraction of China's foreign exchange reserves - the
world's largest - of $1.455 trillion for the same date.
Barely five years ago, chief ministers of leading Indian states such as
Maharashtra, Andhra Pradesh, Gujarat and even communist-ruled West Bengal were
staging global roadshows to attract FDI into India. Now the genie that such
efforts let out of the bottle has created problems of plenty, problems that are
assuming critical proportions.
The incoming funds have helped to drive up the rupee, whose gains have cost
thousands of jobs due to lost export orders, particularly in the textile
sector, which employs 25 million people; 36,000 textile jobs were cut in April
alone.
The finance ministry is caught between financial hawks demanding that the FDI
genie be let free to market forces and more prudent voices urging caution. The
1997 financial crash of Thailand is well remembered, with the collapse of the
country's currency generally believed to have been caused by Thai government
deciding to let it be exposed to the global market.
The FDI policy review comes as an Economist Intelligence Unit report, compiled
in cooperation with Columbia Program on International Investment (CPII), says
India will likely receive $20.4 billion of FDI every year from 2007-11.
The review could include opening India to more sectors such as aircraft
maintenance, real estate, commodity exchanges and petroleum products.
FDI in India's real estate market alone will be worth US$30 billion, as part of
a total market size of $102 billion, in the next decade, a study released on
December 2 by the Associated Chambers of Commerce and Industry of India
(Assocham) said. The real estate sector growth is expected to grow by more than
30% in the period.
The country's FDI inflows jumped 185% to $4.9 billion in the April-June quarter
of 2007-08 compared with $1.7 billion a year earlier, with multinationals such
as UK telecom major Vodafone ($801 million) and Japan's Matsushita ($342
million) leading the field. For the six months to June, FDI surged 218% to
$11.4 billion from $3.6 billion in the same period a year earlier.
"Our FDI policy is perhaps one of the most liberal in the world," commerce
minister Kamal Nath told the media in November. "India remains a favourite FDI
destination despite what is going on in the stock market."
Nath said the government had fixed an ambitious $30 billion FDI target for the
country's 2007-08 financial year (April to March) after total inflows in
2006-07 of $19.5 billion compared with $7.7 billion in 2005-06. The four
metropolitan areas of Mumbai, Delhi, Chennai and Kolkata attract two-thirds of
the total.
Mauritius, a tax haven, is India's largest source of FDI. Japan, Cyprus, the US
and Singapore led the rest of the field. Sectors attracting most FDI attention
include services, electrical equipment, transportation, fuels, chemicals and
construction.
The future of India's FDI policy is attracting comment on the world stage,
particularly how it is balanced against the country's strengthening currency.
At a breakfast press conference in Washington on November 2, International
Monetary Fund managing director Dominique Strauss-Kahn cautioned that any
restriction on inflows could undermine confidence in the economy.
"One point is the transparency of those capital inflows, and we may have some
concern about the distinction between investment inflows and speculative
inflows," he said.
FDI in retail
The most controversial sector for investment, India's retail industry, is the
country's second-largest employer after agriculture and is set for further
strong growth as India's enormous consumer market increases its purchasing
power. A McKinsey Global Institute study places India as the 12th-largest
consumer market in the world and is heading to become the fifth biggest by
2025.
The Indian retail industry, worth $300 billion at the end of 2006, may be worth
$550 billion by 2012, by which time the organized retail sector estimated to
comprise around 16 per cent of the total by 2012, an HSBC Global Research
report forecast. The organized retail sector is expected to be worth about $23
billion by 2010.
The growth potential has already attracted international retailers that range
from Wal-Mart and Starbucks, Marks & Spencer, Tesco, Metro AG, and Liberty
International to Africa's biggest food retailer, Shoprite Holdings and
Singapore-based CapitaLand.
Their increasing presence is raising tensions with the country's domestic
shopkeepers and traders, who face intensified competion from more-efficient
incomers. Three months ago, vegetable and fruits retailer Reliance Fresh (part
of the Mukesh Ambani Reliance Group) was forced to close its 37 retail outlets
by the government of Uttar Pradesh, India's most populous and politically
important state, after small retailers there rioted outside the company's
showrooms. The state government is now studying how organized retailing could
affect local traders. Its counterpart in West Bengal has also expressed
opposition to organized retailers cutting out small traders.
The Indian government has meanwhile commissioned two groups - Indian Council
for Research on International Relations and the National Council for Applied
Economic Research - to study how the retail and agriculture sector would be
affected by FDI and the entry of big corporate and industrial houses.
Ashwani Kumar, Minister of State for Industry, told India's upper Parliamentary
house, the Rajya Sabha, on November 28 that the government was committed to
safeguarding the interests of shopkeepers and traders.
India at present allows 100% FDI in the wholesale cash-and-carry business and
51% FDI in single-brand retailing. No FDI is allowed in multi-brand retailing.
A usual entry mode for foreign players is through the cash and carry business,
either directly (like Metro AG) or through partnerships (like Wal-Mart with
Bharti), and through retail franchise agreements.
International retailers such as Wal-Mart, Carrefour and Woolworths are also
interested in the food processing market, a sector that has trebled in value in
the past two years and is expected to treble again to $326 million by 2009. To
help domestic suppliers profit from the growth, the government plans a
nationwide entrepreneurship development program and to directly link farmers to
buyers without middlemen.
Its FDI policy also aims to help to reduce wastage of fruit and vegetables,
estimated to cause losses of $12 billion annually.
Real estate
The real estate market is set to be another battleground of competing
interests. Big ticket deals involving international investors are building fast
in a market expected to expand by $45 billion to $50 billion in India over four
years from the present $14 billion. In November, UK-based global property
consultants Knight Frank Group announced a $250 million India-focused real
estate fund that aims to raise investments from individuals and other
investors, with an investment threshold of $10.5 million and above.
Kotak India Real Estate International Fund (KIREF) has raised nearly $200
million in its first closure with investors from Japan, the US and Europe. It
aims at a corpus of $377 million.
As a sign of where investments are going, the world's biggest mall, Mall of
India, is being built by the New Delhi-based DLF on National Highway 8,
spanning 32 acres.
"Currently, foreign developers can undertake construction activities on a
minimum space of 50,000 sq ft as a result of which the Indian real estate
sector could achieve an FDI component to the extent of between $5 billion to
$5.50 billion," Assocham president Venugopal N Dhoot told the media on December
2 while releasing the body's analysis of FDI in real estate.
Media
A third contested area involving FDI is the media. The Telecom Regulatory
Authority of India (TRAI) has recommended allowing 74% FDI in the broadcast
sector, on a par with telecommunications as it looks forward to the increased
convergence of the telecom industry with other media.
Present policy allows 26% FDI in TV news broadcasters, 20% in FM radio, 49% in
cable services; 49% is allowed in direct to home TV services but only 20% can
be a direct foreign holding, with the rest being foreign institutional
investment.
Internet service providers (ISPs) and non-news TV broadcasters are allowed 100%
FDI. TRAI had also recommended 74% FDI for head-end in the sky (HITS) - a
satellite-based system to distribute television signals via cable - when this
system arrives in India. The same proportion is proposed for cable TV services
and 100% for services downlinking general and entertainment channels delivered
from outside India.
The government has agreed to the operation of 122 FM radio channels by March
2008 and has invited tenders for allotting another 97 channels. India also
plans to bring out policy guidelines to regulate the content shown by service
providers on Internet Protocol Television (IPTV) and to amend the Press and
Registration of Books Act, 1867.
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