In our recent conversations with Indian companies across industry verticals there is now a growing and troublesome trend that yields to strong statements such as “We are now looking at investing abroad rather than in India.”. The lack of an emerging policy environment and indecisiveness on the government’s behalf has created a situation wherein more companies are looking to garner a major portion of their revenue share from other business friendly regions.
India with an economy that’s growing at close to 8%—plus a huge market and at a time when the US and Europe are struggling with creaking growth, growing unemployment and rising debt, yet the buzz across boardrooms is that investing abroad is “at least headache-free”. They complain about frustrating delays in government approvals at all levels, primarily those related to land acquisition and the environment.
The overseas investment push by Indian companies, often seen as the assertiveness of a rising power, is increasingly spurred by difficulty finding attractive opportunities in India.
At home, rising interest rates and inflation, fierce competition in several industries, and policy gridlock amid a spate of corruption scandals that have put India’s government on the defensive have deterred investment, slowing economic growth and prompting many Indian firms to seek opportunity elsewhere.
While doing business abroad diversifies risk and opens new markets, the export of capital even as inflows slow deprives the Indian economy of investment that could add capacity and ease bottlenecks that drive inflation and crimp growth.
India Inc.’s increasingly global focus also makes it harder for equity investors to gain exposure directly to the country’s consumption-driven growth, with roughly one-third to half of revenue generated by firms in the top 50 firms comes from overseas, even though exports account for just 18% of India’s economy.
It’s worrisome that despite India’s vast opportunities across under-penetrated sectors, companies are venturing abroad for inorganic growth while this is also partly driven by rising global aspirations for Indian companies; another reason for this is a tough competitive field, made no easier by the unpredictable regulatory environment.
Foreign direct investment (FDI) by Indian firms more than doubled in the fiscal year that ended in March to $44 billion.
At the same time, inbound FDI fell by a quarter to $19.4 billion, with planned multibillion-dollar investments by South Korean steelmaker Posco and London-listed India-focused miner Vedanta Resources plagued by delays.
Within India, investment was flat on an annual basis in January-March after growing 7.8% in the previous quarter.
Indian firms have made several big-ticket overseas buys in recent years, and the huge Reliance Industries and Tata conglomerates earn more than half their revenue abroad. However, the recent mismatch in inbound and outbound investment suggests push factors are increasingly at play.
Some corporates are also factoring in a higher degree of political risk for making investments at home than abroad
With an economy growing around 8% a year, 1.2 billion people and unmet demand for everything from housing, roads and power to food and consumer goods, India is hungry for capital. Conditions on the ground, however, can make it hard to put money to work.
Indian home and personal care goods makers Godrej Consumer Products, Dabur India Ltd and Marico are searching for buys in Africa amid fierce competition inside India.
Few question India’s attractiveness as a long-term bet.
Local auto makers Maruti Suzuki and Hero Honda Motors and global giants like Ford and Hyundai Motor are adding capacity in an Indian car market that grew 30% in FY11.
Near-term sentiment is weaker. Three-quarters of leading firms have lost faith in the government and believe a governance crisis and policy limbo will hit economic growth and their investment plans, a recent survey found.
Rising domestic competition is a bigger driver of outbound investment than policy gridlock, which combined with inflation is more of a deterrent for foreign investors.
To sum it up governance issues and the policy gridlock are hitting economic growth, which is “softening quite meaningfully at the moment.”
To know more on Indian companies seeking overseas expansion, talk to our Foreign IPA/EDO services team to assist you in your efforts in attracting Indian companies to invest in your growth region.