G. Srinivasan

New Delhi, Sept 24 India’s free trade agreement with the Association of South East Asian Nations (Asean) and the launch of negotiations for a bilateral trade and investment pact with the European Union (EU) would encourage greater outward investments from India in these regions.

This has been stated by the UN Conference on Trade and Development (UNCTAD) in its latest World Investment Report, 2008. While foreign direct investment outflow from the South Asian region rose by $14.2 billion in 2007, it was dominated by investments from India, which rose to $13.6 billion. Much of it was the result of a significant spurt in cross-border acquisitions.

Indian firms remain active investors in both developed and developing countries, particularly in pharmaceuticals, extractive industries, information technology and other business services. These firms are actively using cross-border merger and acquisitions — which rose 4.6 times to $30 billion in 2007 — as a mode of entry into host countries. The main industries targeted include steel, mining, energy, property and construction. UNCTAD said the growth of Indian companies’ outward FDI has been driven by augmented corporate reserves, high profitability, and relaxation of policies and encouragement by the government.

On FDI inflows into South Asia, UNCTAD said this rose by 19 per cent to $31 billion, mainly due to a significant increase in flows to India and Pakistan. It said India’s robust economic growth, an improved investment milieu and a further opening up of the telecom, retail and other industries led to a 17 per cent increase in FDI inflows to India which surged to $23 billion in 2007.

Stating that strong cross-border M&A sales were a key factor driving such flows, it said substantial FDI in automobiles, telecommunications, real estate and other service industries, including large-scale investments by TNCs such as Vodafone, Oracle, Holcim and Matsushita, were also a factor. It singled out the huge investments made by Vodafone (UK) in India which contributed to the high growth of FDI in telecommunication industries in South Asia.

The single-brand retail window introduced by India in 2006, allowing 51 per cent foreign equity ownership, is encouraging foreign brands to invest and expand their retail activities. A survey of over 300 global retailers found that more than a quarter opened their first store in India last year or are planning to do so in the near future.

Referring to India’s infrastructure, as the investment report deals extensively on transnational corporations and infrastructure challenge, UNCTAD estimates that for the period 2007-12 India would need investment averaging $99 billion a year in 10 major infrastructure segments to bolster planned annual GDP growth of 9 per cent.

While India’s public sector is likely to provide 70 per cent of this investment and the rest by the private sector, UNCTAD apprehends that these ambitious plans could face some financing gaps as those of the preceding periods. Over the period 2001-10, for instance, the annual financing gap is estimated at close to $14 billion.

UNCTAD said that so far in India’s case, FDI has played only a very small and peripheral role in the overall financing of infrastructure. Between April 2000 and February 2008, India attracted only about $1.3 billion FDI a year in electricity, roads, telecom, ports, railways and airports, it added.

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