India dithers while economy slows

India Dispatch: Slowing growth, confusion and delays over economic reforms in India are prompting foreign investors to give the country a wide berth at a time when it is in dire need of investment.

While Ikea is concerned about how it will comply with the rule of sourcing 30 per cent locally from small business, many prospective investors are waiting for a more stable economic environment in IndShow more

Slowing growth, confusion and delays over economic reforms in India are prompting foreign investors to give the country a wide berth at a time when it is in dire need of investment.

Foreign direct investment (FDI) into India plunged 67 per cent in the first financial quarter of the Indian fiscal year between April and June to US$4.4 billion (Dh16.16bn) compared with the same period last year, according to figures from the government.

"Clearly economic growth continues to slow down," says Vaibhav Agrawal, the vice president of research at Angel Broking. "At the same time inflation continues to go up. The whole growth and inflation mix to a large extent can be blamed on policy as well. A lot of policies are not coming through. Infrastructure execution is not high enough. Foreign direct investment is not happening in sectors that need it, like aviation."

The UAE is the 10th largest investor in India in terms of FDI, having ploughed an estimated $2.2bn into the country, according to India's ministry of external affairs. Investors in India from the UAE include the ports operator Dubai's DP World and Emaar, a property developer based in the emirate that built the Burj Khalifa, the world's tallest tower.

Economic growth forecasts for the year have been cut to well below 6 per cent in many cases.

A weak rupee and fears of a sovereign rating downgrade to junk status are other concerns for investors. Meanwhile, political bickering is only helping to delay major economic reforms, observers say.

Analysts note that many investors are waiting for a more stable economic operating environment before injecting funds into India.

From the foreign investment viewpoint, there are a couple of sticky issues regarding regulation, whether it's tax regulations or clarity on FDI, says Vidya Mahambare, the principal economist at Crisil, a ratings and research firm in India.

These include vaguely defined proposals to crack down on tax evasion, which have confused investors, she says. Another major source of concern is that the government seems to be unable to make up its mind over economic reforms, such as its policies on foreign investment into the retail sector. The Indian government last November announced a reform to open up the retail industry to allow 51 per cent FDI in multi-brand retail. But it put these plans on ice soon afterwards because they met opposition from some corners.

"The core of this problem is there are various regional parties that have quite a few seats in the parliament, as a result of which there are many opposing interests at play, so it's very difficult to form a consensus," says Mr Agrawal. "That is the problem the government is grappling with."

In January, the Indian government also decided to remove a cap on foreign investment for retailers that sell only one brand to allow 100 per cent ownership. But it added the caveat that they would have to source 30 per cent of the value of their products locally from small and medium-sized businesses.

This has deterred foreign companies from opting for 100 per cent investment, although many retailers are keen to get a foothold in India, which is regarded as one of the most promising, largely untapped markets in the world. So far, only the Swedish furniture chain Ikea and the British shoe retailer Pavers have announced plans to opt for 100 per cent investment. Even Ikea is understood to be concerned about how it will comply with the 30 per cent rule.

One major flaw is that once giant multinational firms start sourcing from small and medium-sized businesses, these local companies will grow to the point where they no longer fall under the definition of being of small or medium. The consensus is that the government is now in the process of revising this clause, only adding to the general perception of uncertainty.

Rohini Malkani, an economist at Citibank in India, describes lower foreign direct investment, "which is largely a result of an unconducive domestic policy environment", as a "key worry".

India's new finance minister, P Chidambaram, who came into office just a month ago, immediately highlighted that these issues were at the top of his agenda.

"The key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors," he said in a speech days after assuming his role. "Since investment is an act of faith, we must remove any apprehension or distrust in the minds of investors. We will improve communication of our policies to potential investors. The aim will be to remove the perceived difficulties in 'doing business in India', including fears about undue regulatory burden or regulatory overreach."

Investors from the UAE to date have not always had an easy time in India. Etisalat, the UAE's biggest telecommunications company, lost its licence in India this year after the supreme court ordered the cancellation of 122 second-generation, or 2G, mobile licences granted in 2008. Etisalat declined to comment on the situation.

Still, others remain optimistic about India and are ploughing ahead with their plans regardless of the economic concerns there.

Landmark Group, based in Dubai, recently signed a franchise agreement with the coffee and doughnuts chain Krispy Kreme to bring the brand to India.

"Once those [policy issues] are sorted by the government, there is no reason why India will not be attractive again, even with a relatively low growth, because growth elsewhere is also falling," says Ms Mahambare.