Hurdles To FDI To Linger Even After Elections

BMI View: We believe that even with the potential for a business-friendly election outcome, foreign direct investment (FDI) into India is likely to remain subdued for the coming fiscal year 2014/15 (April-March). Domestically, high levels of bureaucracy and continued disagreements between state and central governments will only increase risks for businesses looking to invest in India, keeping them on the sidelines despite efforts to liberalise the Indian market. Moreover, given that around a fifth of FDI inflows into India are into sensitive sectors such as pharmaceuticals and computer technology, we note that disagreements between governments could pose further downside risks to India's attractiveness.

We believe that foreign direct investment (FDI) inflows into India in FY2014/15 will likely to remain subdued despite our view for the business-friendly opposition Bharatiya Janata Party (BJP) to win the upcoming parliamentary elections in April-May. Current FDI inflow for the current fiscal year FY2013/14 up to January has been lacklustre, coming in at US$18.7bn versus US$19.1bn over the same period in FY2012/13. At these levels, the amount of inward FDI received for FY2013/14 could turn out to be one of the lowest in the past seven years.

We expect two domestic factors to prevent a strong resurgence of FDI; the high levels of bureaucracy and continued disagreements between state and central government over policy priorities. Moreover, we highlight the risks that disagreements with foreign governments may pose to FDI inflows, given that at least a fifth of FDI that India receives goes into high-tech and sensitive sectors. Failure to address these issues by Indian political leaders could see investors remain on the sidelines. The lack of FDI could leave India more dependent on shorter-term portfolio inflows to finance its current account deficit, which would, in turn, leave the Indian economy more vulnerable to global sentiment.

Hurdles To Prevent A Return To Previous Peaks...
India - FDI Equity Inflows, US$bn

BMI View: We believe that even with the potential for a business-friendly election outcome, foreign direct investment (FDI) into India is likely to remain subdued for the coming fiscal year 2014/15 (April-March). Domestically, high levels of bureaucracy and continued disagreements between state and central governments will only increase risks for businesses looking to invest in India, keeping them on the sidelines despite efforts to liberalise the Indian market. Moreover, given that around a fifth of FDI inflows into India are into sensitive sectors such as pharmaceuticals and computer technology, we note that disagreements between governments could pose further downside risks to India's attractiveness.

We believe that foreign direct investment (FDI) inflows into India in FY2014/15 will likely to remain subdued despite our view for the business-friendly opposition Bharatiya Janata Party (BJP) to win the upcoming parliamentary elections in April-May. Current FDI inflow for the current fiscal year FY2013/14 up to January has been lacklustre, coming in at US$18.7bn versus US$19.1bn over the same period in FY2012/13. At these levels, the amount of inward FDI received for FY2013/14 could turn out to be one of the lowest in the past seven years.

We expect two domestic factors to prevent a strong resurgence of FDI; the high levels of bureaucracy and continued disagreements between state and central government over policy priorities. Moreover, we highlight the risks that disagreements with foreign governments may pose to FDI inflows, given that at least a fifth of FDI that India receives goes into high-tech and sensitive sectors. Failure to address these issues by Indian political leaders could see investors remain on the sidelines. The lack of FDI could leave India more dependent on shorter-term portfolio inflows to finance its current account deficit, which would, in turn, leave the Indian economy more vulnerable to global sentiment.

Hurdles To Prevent A Return To Previous Peaks...
India - FDI Equity Inflows, US$bn

Indian Bureaucracy Adds To Uncertainty In Business Environment

Any reforms to India's investment approval processes will be slow to implement given the sheer number and overlap between departments and ministries, and as such, we believe it will remain a hindrance to foreign firms looking to invest in India. Greater bureaucracy increases the time and effort businesses have to expend in order to secure the needed approvals, and also increases the level of uncertainty that firms have to face as the varying stakeholders often have conflicting interests and different priorities (for an example, see 'Fragmented Regulatory Regime Pushes Investors Out', October 21 2013). Indeed, we alluded to this lack of coordination within the government in our previous analysis (see, 'FDI Liberalisation Encouraging, But Stumbling Blocks Remain', July 18 2013), where we highlighted that the lifting of foreign ownership restrictions was positive, but not sufficient given the lack of supporting policy in other equally important areas (the land acquisition bill is a case in point). Unsurprisingly, this problem has led to conflicting policies and has also stymied local efforts to boost infrastructure. One example is Walmart's decision to abandon its original plans for brick and mortar stores with Bharti Group and instead, opted to sell electronically to wholesalers, which involves far fewer licenses and government departments.

Differing Central And State Priorities To Weaken Attractiveness

Disagreements between state and central government over policy priorities will dilute policymakers' efficacy and further elevate the uncertainty faced by firms. In turn, this could also negatively alter the risk-reward profile for a business entering the Indian market. An example is the opt-out clause for states included in the central government's decision in September 2012 to allow foreign participants to invest up to 51% of multi-brand retail operations. Firstly, the opt-out clause created uncertainties as to which states would adopt the legislation (only 12 states have done so). Secondly, risks have increased further as the states of Rajasthan and Delhi have since reneged on their initial decision to adopt the ruling. Indeed, we believe that these disagreements between state and central governments will persist given their differing political ideologies and socio-economic priorities. Moreover, we expect these differences to weaken the central government's policy-making ability given that the central government (coalition) will remain reliant on the support from minority parties that helm the state governments.

Political Concerns Could Weigh On Inflows Into Sensitive Industries
India - Breakdown Of FDI Equity Inflows By Investing Country (LHS) & Sector, % Of Total

Tenuous Political Ties Could Present Further Woes

In addition to the domestic obstacles, we highlight that ties between Indian politicians and their counterparts from investing countries could have an impact on FDI given that at least a fifth of FDI inflows to India is into sensitive industries such as pharmaceuticals and telecommunications. Indeed, we believe that the ongoing disagreements between India and the US highlight these risks (for more details see, 'Conflicts Extend Beyond The Pharmaceutical Industry', March 18), and a failure to resolve differences could reduce the appeal of investing in India, and further weigh on FDI inflows.

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Related sectors of this article: Economy, Balance of Payments
Geography: India
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