India | Investment Patterns

Abhishek Anand | Kunal Ahuja

Amit Mirchandani | Nihit Jain

Vaibhav Kukreja | Vaibhav Sathe

Group 7

Agenda

Problem statementInvestment – definition & roleIndia – Trends & PoliciesIndia – Lesson from ChinaIndia - Recommendations

Problem Statement

To analyze various forms of investment across two dimensions- trends and governing policies and suggest ways to improve FDI in India

Investment |Definition & Role

InvestmentFlow of spending that adds to physical stock of capital over a given period3 subsectors

Business fixed investment- plants, machineriesResidential investment- new houseInventory investment- new inventory

Major Drivers-Monetary and fiscal policiesRental Cost of capital – interest rate, depreciation rateExpectations of Future Level of outputTaxes- corporate income tax, Investment tax credit (affects rental cost of capital)Behavior and sentiments of various stakeholders – like Credit rationing

Forms of Investment

Foreign Direct InvestmentInvestment in enterprisesGives rise to MNCsParent firm should own at least 10% shares

Foreign Institutional InvestmentInvestment in financial markets by foreign companiesTypical investors – banks, insurance, mutual funds, hedge funds

Domestic InvestmentPublic, Private and Household Sector

Investment Need in IndiaGenerate sustained economic growth

Create employment opportunitiesMultiplier Effect - Investment causes GDP to rise more than the spending

Contribution of FDISpill-over effect – technology, management techniques, skilled labourImproving quality of business environmentAccumulation of productive capital for future growth

India |Trends & Policies

Domestic investment: TrendsBuoying investments due to robust consumption

demandAutomobile, Power, Infrastructure and allied industries are witnessing major capacity addition Consumer durables pacing up the growth of industrial revival

AlthoughPublic saving-investments balance are negative due to higher fiscal deficit Private saving-investments balance though on rise, are not sufficient

The government measures intend to improve consumer confidence and effect Demand sharply.

fiscal stimulus package tax cuts for producerseasing of borrowing costs

Domestic Investment: PoliciesBudgetary Policy measures in small and medium

enterprises (MSME):Enhancing allocation by US$ 535.8 millionIncreasing the limit for presumptive taxationRaising the threshold for compulsory auditing Extension of interest subvention for exports in certain sectors Exemption from capital gains tax to facilitate conversion of small businesses to limited liability partnership (LLP) format

Other Policy InitiativeGovt. approved six proposals for setting up of SEZs, tax-free zones, Food Parks, IT/ITeS tax-free zoneState Investment Promotion Board (SIPB) of states like AP has approved fast tracked industries aiming to generate jobsSIPB has also announced to give nearly 50 per cent VAT/CST or SGST reimbursement for the next 5 years

FDI: Policies

Prior to 1991, highly regulated environment

Post liberalization, deregulated regime

FERA amended and consolidated to FEMA

FEMA: less stringent and investor friendly

Consolidated FDI Policy 2010 - FDI permitted in

almost all sectors

FDI: Policies

Three primary institutions in India that handle FDI-

related issues

Foreign Investment Promotion Board (FIPB), the

Secretariat for Industrial Assistance (SIA), and

Foreign Investment Implementation Authority (FIIA)

Two other institutions-Investment Commission and

India Brand Equity Foundation also work for the

same

FDI: TrendsGrew steadily through first half of 1990s

Stagnated between 1996-97 and 2003-04 (3-5%)

Grew at a rapid rate from 2004-05 to 2007-08 (7-

9%)

Reasons were liberal policies and growing domestic market

of India

Global recession slowed down FDI inflow growth in

2008-09

Following economic recovery, FDI inflows of $30.25

billion in 2009-10

Brown field investment more than green field

FDI: TrendsSector-wise analysis of FDI from 2001-2009

21%

10%

7%

6%6%

50%

services sector

computer software and hardware

telecommunications

housing and real estate

construction activities

others

FII: PoliciesCurrent limit of Foreign Institutional Investors (FII)

investment in Government Securities increased by

US $ 10 billion

Current limit of FII investment in corporate bonds

also increased to US $ 20 billion.

Ceiling for overall investment by FIIs- 24% of the

paid up capital of the Indian company.( 20% for

PSUs)

FII: Trends

Dramatic increase in FII inflows to India over the

period 2003-2007

Major reason- stock market rally that climaxed in

January 2008

Recent global financial crisis saw FIIs pulling out a

record $13 billion

Recently, an explosive growth in FII’s on account of

global economic recovery and high growth

potential of India

India |Lesson from China

Highlights

PARAMETER INDIA CHINA

GDP USD 1.2 Trillion USD 7.8 Trillion

GDP Growth Rate 6.7% 9.1%

FDI USD 30 Billion USD 90 Billion

Investment as % of GDP 31% 39.1%

Human Development Index 0.612 0.772

Foreign Exchange Reserve USD 587 Billion USD 2.4 Trillion

*2009 figures

China : Manufacturing

Labor intensive growth, rooted in the end of collectivization of agricultureHuge focus on small scale rural industryStrongly linked to export Extensive infrastructure creation for support of manufacturing based economyNearly 80% of world’s computer and related hardware is manufactured by Chinese companies

19951997

19992001

20032005

20072009

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000China : Foreign Trade

Exports: AnnualImports: AnnualTrade Balance: Annual

Mill

ions

of U

S $

Source: www.site.securities.com

China : FDIChina is the largest country with FDI inflowsFDI now accounts for 15% of China's real estate market

COUNTRY NO. OF DAYS TO OPEN NEW

BUSINESS FOR FOREIGN COMPANY

Brazil 166 daysRussia 31 daysIndia 46 daysChina 99 days

Jan-2010

Mar-

2010

May

-2010

Jul-2

010

Sep-2010

Nov-2010

0

5000000

10000000

15000000

20000000

25000000

China: Fixed Assets Investment: ytd

Fixed Assets Investment: ytd

Mill

ion

RMB

BRIC nations fall below the 7-10 days standard of developed economies for new business starting lead time(World Bank 2010 Report)

China : Foreign Reserves

19951997

19992001

20032005

20072009

0

500

1000

1500

2000

2500

Foreign Reserves: Annual

Billi

on U

S $

Regional DisparityIndia –

State government policies – stability, SEZ impact

Maharashtra, Gujarat, Karnataka and Andhra Pradesh attracting

more

U.P./Bihar less – Per capita income 50% below national average

China

Similar problem existed in Western China which was addressed by

China Western Development Program

Govt. initiated massive infrastructure investment in agriculture,

technology, health and education

Xinjiang GDP increased from 220 Billion RMB in 2004 to 430 Billion

RMB in 2009

Why India lags in FDIPoor state of India’s infrastructure

Many towns and villages face daily blackouts

averaging 8 hours a day

Ports and airports lag when compared to world-

class ports or airports

Road network insufficient in India

Acute labour market rigidities

Lack of sufficient number of skilled labor

India |Recommendations

RecommendationsUniform SEZ development

Establishment of SEZs in strategic locations

Quality of FDI InflowsA large portion of the new inflows in the form of M&As.Does not necessarily imply new capital infusionMaximize spill-over benefits from FDI on a sustained basis

Investment promotion strategyEffectiveness of Foreign Investment Implementation Authority (FIIA) to be enhanced

RecommendationsImage branding for manufacturing

Need to get rid of the tag that India can only do services and not manufacturingGovernment can play a significant role

Workforce Quality DevelopmentNecessary to monitor the quality of students and of teachers in educational institutions

Coordination between Union and StatesEfficient Financial Markets

Development of a deep and liquid corporate debt market

RecommendationsIntellectual Property

Attracting greater FDI into R&D strengthens India’s technological prowess and competitivenessInadequate safeguards for protection of IPRs cause a diversion of investment from technology intensive industriesHence, needs for strengthening intellectual property rights or IPRs

Thanks | Any Questions?