‘FDI inflows into India to take a hit this financial year’

Posted online: May 05, 2009 at 2336 hrs

Jai Sinha, MD, India, Booz & Co

At a time of the global slowdown, 52% of the total respondents of a recent survey on foreign direct investment (FDI) in India carried out by global consultants Booz & Company and AMCHAM said that the country is an attractive FDI destination. However, 60% of them were concerned about poor infrastructure, while 55% opined that lack of clarity in the FDI guidelines trouble them while making investments. Other worries included red-tapism and shortage of skilled professionals. FE's Arun S spoke to Jai Sinha, managing director, India, Booz & Co, on these issues. (Excerpts)

FDI into India declined in five of the last six months till March 2009 (barring January 2009). How will it fare in the coming months?
The over-emphasis on monthly FDI figures is misplaced. The average FDI (including reinvested earnings) is now about $2.5-3 billion a month, leading to $33-36 billion a year. There is a fundamental optimism about FDI in India. India will not go back to FDI of $5-billion-per-annum kind of a situation. Instead of investing in one go, they may invest smaller amounts initially. The underlying resilience of the investment will continue owing to Indian market's attractiveness. India's GDP may not be growing at 9%, but even at 6% it is higher compared with many other countries. In absolute terms, I don't think India will have the same FDI inflows in 2009-10 as it had in 2008-09. But in terms of how it is overall compared with the global figure, it will be okay.

Why has FDI into other sectors, especially services, grown dramatically faster than manufacturing? Will this trend continue?
Since the services sector in India is attractive, the growth in FDI is very dramatic. But manufacturing has a lot more constraints. Transforming capital into assets or output is more difficult in manufacturing than in services. Manufacturing is more impacted by constraints in infrastructure, policy delays due to red-tapism, etc than services.

What are the policy restrictions affecting FDI inflow?
Addressing infrastructure constraints at local levels are more important than macro-level policy issues. Issues like land acquisition, power and logistics can subtract 50% from profitability. These are the main challenges that will have to be addressed at local and the state government levels. If you want to get more FDI, especially into manufacturing, then focus on infrastructure development, talent pool and local policy. If you can't solve all the issues in manufacturing, segment them either by geography or by industries, like it was attempted in the SEZ policy. Select some leading sectors to begin with. The government needs to ensure that there is consistency irrespective of the change in the political situation. It is important to give confidence to investors that there are consensus and consistency regarding policy direction.

Do you feel the need for further simplification of FDI guidelines?
Lots of automatic approvals are taking place. So, at that level things have been simplified. But the ability to bring capital into the country is not everything. What is more important is the ability to transform it into output. We may be able to bring in FDI through certain automatic sectors. But if I bring in, say, FDI worth $500 million and need to get 500 permits to convert the same into a functioning manufacturing unit, then what's the point. The National policy allows you to bring in FDI. The rest depends on local policies--how easy or difficult they are.

Due to the slowdown, do you see any new sources of FDI emerging?
Investments from the UK, the US and NRIs account for over 50% in terms of sources of FDI in India. But as the FDI pie expands, new sources of capital, including from the Middle East, are emerging. This did not occur six or seven years back. More important than the actual flow is the conversion. The investment community has acknowledged that India is an attractive FDI destination.

What is your take on liberalization of FDI in the retail sector?
In the long term, my leaning is towards liberalization of FDI in retail. India's service sector in retail is very competent. I also understand the compulsions and constraints. There are many small and marginal traders in the business and you don't want to drive them out overnight. I definitely will not advocate opening up of everything tomorrow. The political backlash would be such that it will become unsustainable. We should have a consensus so that it stays for a long term. The biggest enemy of

FDI is inconsistency. If I know the direction and the pace at which it is moving, I can plan. But if you go zigzag, then I find it difficult to invest in such a country.

What are your views on the importance of transparency regarding FDI from tax havens like Mauritius and Cyprus?
In every system people can figure out the loopholes and exploit them. This is a quasi-legal framework issue and I have no comments. My concerns are regarding solving other fundamental problems.