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India leading investor in LDCs; record FDI flows to Iran

7 Jul. 2013 11:28 PM IST Indias financial health is now a global concern. There is twilight. It is India, which is leading in green-field investments in the least developed countries (LDCs). But India is losing out on many other areas including on foreign direct investment (FDI), ability to cash on value chains and unstoppable inflation. This is what the World Investment Report (WIR) 2013 of United Nations Conference of Trade and Development summarises. The report is sub-titled Global Value Chains: Investment and Trade for Development. The report is subtly critical of Global Value Chains (GVC) or global trans-national corporation factories, located largely in Asia. The TNCs in the name of setting up competitive export-oriented industries in developing countries is putting pressure on both wages and working conditions a reminder to the recent Bangladesh garment factory fires and collapses. Jobs created by GVCs vary in quality. Workers can face low pay, tough working conditions and insecurity. In such a scenario, in 2012, India has emerged as an island as its companies invest in geographically and sectorally diversified LDCs. Indian companies were responsible for 20 per cent of the total value of such investments. Mozambique was the largest recipient of Indian green-field investment (45 per cent), Bangladesh (37 per cent) and Madagascar (8 per cent). Indian invested $ 4383 million in 2012 in LDCs against $ 4219 million in the previous year. Investment by China during the period has come down to $ 918 million from $ 9955 million. Except South Korea, which invested $ 996 million, investment by other Asian countries declined. Other large investing countries were the US (15 per cent), Japan and United Kingodom (6 per cent each), South Korea (5 per cent) and China (4 per cent).Indian investments were also made in eastern and southern Africa. The projects were not limited to large-scale investments in extractive and heavy industries but also extended to smaller ones in pharmaceuticals and health care. In Asia, Bangladesh was the only LDC where such Indian investment was announced during 2012. Indian projects were spread over various industries, including automotives, IT, textiles and tyre.In pharmaceuticals too companies from India made investments in Uganda and Tanzania and Rwanda. Each investment was worth $ 5 million. Among these there were two health-care ones as well. India also leads in health care investments. Over a dozen of the 25 health care projects in LDCs originated in India, about 25 per cent of the aggregate value of the projects. Overall, India continues to remain the dominant recipient of FDI inflows to South Asia. Despite a drop of 29 per cent it received $ 26 billion. Bangladesh at $ 1 billion remained the next highest FDI destination in South Asia. Iran, amid economic sanctions from the US and EU, recorded historic 17 per cent increase in FDI to $ 5 billion. Despite the sanctions, more than 400 foreign companies are now directly investing in Iran. In the current year,

according to MD of Organization for Investment, Economic and Technical Assistance of Iran Behrouz Alis, Iran has signed MoUs valued at $ 7 billion.India is also investing in Iran for developing Chabahar port for linking it to landlocked Afghanistan.A significant aspect has been the rise of United Arab Emirates as an investor. The companies from UAE are active players in the region in mergers and acquisition (M&A). The Jet-Ettihad deal is only an indicator. There are many more in the pipeline. Some UAE countries like Abu Dhabi have assured India of larger investments for every such deal. Indian economy experienced its slowest growth in 2012 and it is not improving. Inflation and falling growth have affected investor confidence. But the study contends that countrys FDI prospects would improve. Inflows to the services sector are likely to growbecause of of efforts to open up key economic areas such as retailing. Flows to manufacturing are expected to increase as a number of countries, including Japan and South Korea establish country and industry-specific industrial zones in the Delhi-Mumbai corridor. Korea is setting special zone for its companies in Rajasthan. These bilateral efforts may result in an increasing amount of FDI. The study would like India to follow Sri Lanka in the garment sector. Domestic firms dominate the garment industry in Sri Lanka unlike those in Bangladesh and to large extent in India. This has made some difference in the working conditions, which are considered to be better in Sri Lanka. Though between 2005 and 2008 Indian companies had 18 cross-border M&As, that included giant one like Jaguar and Corus by Tatas, in the UK, US, Australia, Sudan, Indonesia and Turkey, there was none in 2012. Bharati Airtel expanded its telecom operations to 15 African countries. Of late, Indian conglomerates have pulled back from large and outbound M&A owing largely to financial constraints. As a result outflows from India decreased to $ 8.6 billion and the total value of cross-border M&As have dropped by nearly three-fifths in 2012 to about $ 2.65 billion. West Asia for long may not remain the job market for Indians. It is more indignising as there is a youth bulge. It has started with Saudi Arabia as it has taken steps to augment Saudi employment in private sector. The policy of Saudisation with a new law calle called Nitaqat limits the number of foreign workers that companies can hire. This problem has already contracted jobs in West Asia. In the near future, an exodus of Indian workers many begin. It could cause problem for the domestic job market, which has also seen many lost opportunities. It might affect Indian economy in adverse way as foreign exchange remittances would come down adding to further balance of payment problems.A silver lining is that many companies faced with rising wages as more and more expatriates are replaced with the local people may look for new locations. India has yet to emerge as a new destination for them. There are opportunities to work it out. Would that happen? The world economy would remain in turmoil.

Western economies, WIR says, are having less and less capacity either to absorb investment or invest elsewhere. In this transitional phase, India has many opportunities but it is also facing myriad problems. The biggest of these being erosion of value worth of company reserves amid rupee that is losing its sheen. Would India be able to maintain the lead that it has taken in some areas including creating friends among LDCs?

When we try to look at the impact on employment because of the coming of big retailers, the first thing which comes in the mind is the disposition of small and medium retailers which will surely not be able to compete with the price and variety, the big retailers provide. This is indeed true but the question is -Is this the only impact? The answer is definitely NO. Lets try to first understand the present economic condition of India. The International Monetary Fund (IMF) survey of global economy has found that- Among BRIC countries, Indias government debt is found to be highest at 67.57% of its GDP, followed by the Brazilian government debt at 65.09%. On the other side, debt levels in Russia and China are comfortably fixed at around 8.37% and 22.03% respectively. The exports from India reduced for the fifth straight month in September while imports rose, pushing up the trade deficit to an 11 month high of 18.1billion $exports decreased 10.8% from a year ago to 23.7 billion $ while import increased 5.1% to 41.8 billion$. Exports have decreased sharply this fiscal due to reducing demand from west, a major market for Indian goods and other markets like Korea and Japan. The sectors affected most include petroleum products, engineering goods, gems, jewellery, drugs and ready made garments. Overall we can say our trade deficit is increasing year after year. The manufacturing sector is a major contributor for the existing trade deficit. The information above indicates that we are continuously losing our edge on manufacturing sector because of the presence of cheaper Chinese goods. This might have a serious implication on the employment condition in India. Now lets see how big retailers widens this import export gap particularly in manufacturing sector in countries like India whose markets are already flooding up with cheaper goods of China which ultimately leads to unemployment. Lets consider an example of Wal-Mart, started its business in China. The total value of the goods and services traded between US and China is $539 billion in 2011.Exports totalled $128 billion; Imports totalled $411 billion. The US goods and services trade deficit with China is $282 billion. China is currently the largest supplier of goods for US. The value of US goods imports from china is $399.3 billion in 2011, 9.4% increase from 2010, and up 299% since 2000.The major import categories in 2011 were Electrical machinery, Machinery, Toys and Sports Equipment, Furniture and Bedding, and Footwear. As per the report of Economic Policy Institute, The United States is accumulating foreign debt and losing its expertise in export, and the growing trade deficit with China has been a major contributor to the employment crisis in U.S. particularly in manufacturing sector. Between 2001 and 2011, the trade deficit with China displaced more than 2.7 million U.S. jobs, 76.9 percent of which were in manufacturing sector. Some critics say China has achieved its rapidly growing trade surpluses by devaluing of its currency artificially and have used various tactics like repressing the labour rights, suppressing their wages, subsidizing their products and thus making their product cheaper. China thus gives a conducive environment to big retailers like Wal-Mart to increase their profits while exporting from China and selling it across the globe. We are nowhere different from America in this case whose manufacturing sector is struggling because of the presence of cheaper Chinese goods. We need to reduce the government debt and at the same time we need to decrease the trade deficit to improve the employment condition in India. To reduce the debt we need serious reforms which can inject money in to our market. For this allowing FDI in retail is not at all a bad option. This will indeed inject surplus money in to Indian market. But then question comes how to reduce the trade deficit. The answer is definitely 30% rule The rule says: At least 30% of their goods and product must be procured from local source.The rule is definitely the trump card thrown by GOI considering Indian framework and priorities in mind. This might help in reducing the trade deficit and at the same point small enterprises producing intermediary goods and ancillary items will benefit. This 30% rule will help in balancing the trade deficit caused because of downsizing of manufacturing sector. As the retailers who wants to expand their business must procure 30% of their goods from local companies and industries, will help small retailers and dealers to sustain their profits and also it will provide new market opportunities to small enterprises, local companies and industries.Some 20-40% of all fruits and vegetables grown in the country go waste due to poor storage, transportation and handling infrastructure. As per govt regulation- At least 50% of total investment will be made on back-end infrastructure. Therefore foreign companies will invest huge capital in India. As a result, refrigeration technology, infrastructure facilities, transportation, etc. will be re innovated. That will boost exports and also lead to low-inflation rate.

Foreign institutional investors last month pulled a staggering net US$7.2 billion from Indian stocks and bonds, according to data from the securities and exchange board of India (Sebi). There is little sign of relief in the near term, some analysts say. "I believe there are both global and local factors involved," says Kamal Sen, the president and chief executive of Cogitaas, a consultancy specialising in strategy and planning.

"Globally, the Fed seems to be giving some indications that the US economy is on the path to recovery and this has led to the US dollar strengthening and investors pulling out of emerging markets and into the dollar." The rupee has plunged to record lows against the dollar in recent weeks, hurting sentiment towards investment in India. "The sharp fall in the rupee-dollar exchange rate has also led to expectations of higher interest rates in India and this is obviously adversely affecting the bond markets and fixed income investment," says Mr Sen. "The weakening rupee is also affecting short-term equity investors who are concerned about further depreciation. Some analysts believe the rupee can depreciate more based on analyses of inflation differentials between India and US." General elections in India are expected by May. This means investors are expecting big-ticket reforms to be delayed, with the government reluctant to take steps that could upset voters. "I'm sensing a slightly exaggerated sense of negative view and pessimism among both business people and investors in India, which is not in sync with what my own views are," says Hrishikesh Parandekar, the chief executive and group head of broking, wealth management and asset management for Karvy Private Wealth. "It's largely on the back what the government is not doing on reforms, which is only part of the story. What that means is between now and the time the elections happen, there is going to be that known uncertainty, which is going to be a pretty large uncertainty, which will have a larger impact, less on the real economy, but more on the stock markets. "It will continue to be a drag on equities. Even if we see a couple of strong quarters of strong earnings growth, it's unlikely to break out in a big way because of the big uncertainty of what's going to happen over the elections." Everyone agrees the elections have a major role to play in shaping India's financial markets and investor sentiment. India's government in September opened up multi-brand retail to up to 51 per cent foreign direct investment. But there has hardly been a flurry of activity since the announcement. There are expectations the government will open up other sectors to more foreign direct investment (FDI) this month as it strives to attract more funds from overseas. Additionally, there are hopes the government will ease its stringent criteria on FDI in retail to make it more appealing to investors. "The local factors are primarily political," says Mr Sen. "Not only is a national election imminent within a year but, more important, the outcome of economic policies from the next election is uncertain. Depending on the ruling coalition, it could be very socialistic, very inward-looking, or relatively more liberal and globalised. Moreover, it may be a mixture of these in an inconsistent fashion, depending on specific demands of smaller local parties - for example, FDI policy for retail, where each state government has its own views and there is great divergence. "The outcome of the next election is not very predictable at this point. This will affect FDI and the plans of any longterm foreign [or domestic] investor. As to when it will end - of course, the elections being held and a new government being installed will lead to diminished uncertainty," says Mr Sen. "However, if the next government is a fragmented set of diverse parties, the uncertainty may continue for much longer." Rajesh Cheruvu, the chief investment officer at RBS Private Banking in India, highlights the attractiveness of growth in Indian markets, which could help demand for stocks to pick up. The slowdown in economic growth in India, which was at a decade low of 5 per cent in the past year, is widely believed to have bottomed out. "At the moment we are seeing some of amount of risk aversion towards emerging market equities," says Mr Cheruvu. "Once that recedes, depending on the timing of the Fed's tapering, you might see flows coming back into Indian markets."

It seems that India is constantly a step behind in the present investor confidence plunge in the country. With a lack of controlover the fallingcurrency,investorsare leavingthe countryas capital outflowsincrease. The efforts by the central bank to curb the depreciating currency since July have included tightening the money supply, restricting currency derivatives, and curbing gold imports. Gold is being seen as the safe investment in India right now and the rise in the demand corresponds with a sharp decline in the value of the rupee. The declineof the Rupeeis resultingin a flight of ForeignDirectInvestment(FDI). The efforts were weak and ineffective and so now, the Reserve Bank of India (RBI) is limiting Indian investments from going out of the country, which will further dampen the demand for dollars. The cycle is becoming more

and more vicious as the falling rupee leads to an exodus of FDI in the country which puts downward pressure on the currency itself. Over the last two years, the rupee has fallen by more than 25 percent. The recent move has alreadymade someindustry experts call for capital controls; however, at this point the ability to invest outsideof India, is only restrictedto Indianinvestorsratherthanforeigninvestors whichis seenas a half measure. The recent growth in the local industry of India and the export of many of its operations has slowly led to the crisis at hand. The strategy of the companies to invest outside its border and investing in terms of market growth, expansion and setting up operations outside the country caused the steady decline in the currency. The market has responded positively to the recent move with a rise in the currency forwards but the long term impact will have to be seen to reach any certain conclusion. The rupee has already lost more than 10 percent of its value since January hitting an all-time low of 61.8050 per dollar on 6th of August. The plunge accelerated in May as many of the investors withdrew from equity and bond markets. This makes controlling the drop the top priority for the RBI in order to gain back the investors and the policy changes are signaling that serious thought is being put in to making that happen. The problem arrives at balancing between free market and capital controls which can deter foreign investors from investing again and further harm investor confidence. The dilemmafaced by India is classic economic theory. It states that no country can balance free capital movement, stable currencyandindependenteconomicpolicyall at the sametime.Theyhaveto choosebetweentwo and let go of the third. In order to get more capital into the country, the interest rates have been increased twice in the recent past which would have led to higher demand in the rupee. In addition, the rush into gold market was limited by imposing duties on the import of gold and gold storage was mandated into government owned warehouses which would limit the trading into the gold market. As gold is tied to the dollar, a rise in demand leads to a higher supply of the rupee depreciating its value. Experts believe that these short term solutions will not lead to major changes and that investment opportunities should be made more attractive into India in order to curb the constant decline in the currency. Capital inflows will have to be brought back in order to support the currency which was in place before. The current crisis mirrors the rising current account and budget deficit of 1990s where the rupee fell by more than 30 percent between 1991 and 1992. Back then an emergency loan was taken from the IMF of USD 2.2 billion to purchase gold as collateral for the reserves. The loan aided the country to open its borders to international investment which caused the country to first see a slowdown in its GDP growth in 1992 but then a rise in its GDP since.

Indias economic growth is expected to slow in the coming years and the rise in recent interest rates will weigh heavily on local industries, further decreasing the growth potential over the next few years. With a current account deficit, there is an expectationthat things will get worse before they get better and the country will have to sell its gold reservesto sustain the economy. Serious measures are required to encourage more investment in the country and it might be that the limitation on investments that India does have, might need to be abolished in order to lead to long term growth of foreign investment.