India losing its sheen for foreign investors

DPA/New Delhi

The country is in danger of losing its reputation as a preferred business destination after a recent flight of foreign investments, even as it struggles to recover from its worst slowdown in more than a decade.

Asia’s third-largest economy desperately needs foreign capital to revive growth, but it has been jolted by the pullout of two of its biggest investors in recent weeks.

Steel giants ArcelorMittal and Posco recently scrapped projects totalling more than $13bn, citing inordinate delays in securing land or mining rights due to local protests.

Global investment flows have fallen sharply over the past year, due to macroeconomic fragility and the policy uncertainty faced by investors.

The world’s biggest emerging economies - Brazil, Russia, India and China - have been most affected but India appears hardest hit, as investors find it a tough place to do business.

Once bullish about India, investors complain of red tape, delays in permits and regulatory uncertainty which they say render their projects unviable.

National Planning Commission member Arun Maira concedes that an unfriendly business environment, rising interest rates and input costs, along with a weakening rupee, are hurting investment.

“Investors look at the recovery previous investments make. When they hear about projects stuck or investments not paying off, it deters them from putting their money in. India loses out on being an attractive option,” he said.

Foreign direct investment slumped by 36% to $22.4bn in 2012-13, against $35bn in the previous year, despite the government easing curbs on a dozen key sectors including retail, telecoms, insurance and aviation.

Other high-profile pullouts were seen in the electricity, telecoms and financial sectors, including that of Britain’s 3i, the world’s largest India-dedicated infrastructure fund.

Morgan Stanley and the Royal Bank of Scotland have also drastically scaled down their operations.

Surveys show that most companies have no major investments lined up this year, while others are delaying their plans until after next year’s elections.

In fact, more capital is being invested by Indian companies abroad than the other way around.

Reserve Bank of India data shows that firms committed to fund overseas expansion of about $26bn in the past year. Building on economic reforms launched in the early 1990s and driven by its flagship service sector, information technology and pharmaceutical firms, India was poised to give China’s economic juggernaut formidable competition.

It logged rapid growth peaking at nearly double digits until 2008 but has since slumped, falling to a decade-low of 5% in the past financial year. But unlike the highly centralised decision-making in China, India pays heed to dissent and its minorities, which can often delay projects. Protests by communities fighting for their land rights and livelihoods have brought several large projects under scrutiny.

Industry leaders recently met Premier Manmohan Singh, urging him to remove hurdles to investments and make faster approvals for projects. Finance Minister Palaniappan Chidambaram, who eased restrictions on investments last month, has promised to bring more clarity to policies and push further reforms to attract foreign funds.

Premier Singh remains optimistic about the economy and reforms.