India drew $28 billion foreign direct investment (FDI) in 2013 against $24 billion in the previous year, shows a report for 2014 by the United Nations Conference on Trade and Development. However, its ranking in terms of most-favoured FDI destination slipped by a notch compared to the one given in the report for 2013.
The World Investment Report, 2014 showed that policy uncertainty on allowing international supermarket chains kept investors on tenterhooks. As such, it suggested India should look at the option of non-equity flows in multi-brand retailing to avoid friction between local and foreign companies.
Though in terms of its ranking in drawing FDI inflows improved a notch to 14th in 2013 compared to 2012, its position in terms of the most-favoured FDI destination took a beating to the fourth in the report for 2014 against third in the 2013 report.
An Unctad report shows a survey of companies ranking countries in terms of most-favoured FDI destination for three years. As such, the report for 2014 shows the ranking for 2014-16 and the one for 2013 shows the ranking for 2013-15. The survey in the 2014 report was based on the responses of 164 companies.
India used to be the second most attractive FDI destination till 2008-10 after China (the 2008 report), but its ranking slipped since then, said FDI researcher Premila Nazareth, who made a presentation at the release of the report.
After the 2008 survey, India’s ranking came down and it was positioned at the third destination for 2009-11 (the 2009 report). It again came up at the second position in the 2010 report, but again slipped to the third position in the 2011 report. In the 2012 report, India’s position fell to the seventh but improved to the third position in the 2013 report. It should be noted that retrospective amendments to the Income Tax Act in 2012 drew flak from investors.
Nazareth said policy uncertainty and slowing down economy are taking a toll on India’s most- favoured investment destination ranking.
Although India drew slightly more FDI in 2013 than in the previous year, “foreign investment continues to flow into single-brand retail, no new investment projects have been recorded in multi-brand retail and, in fact, divestments have taken place”, the report added.
Major multinational corporations that entered India after the first round of liberalisation have taken steps to get out of the market. For instance, Walmart abandoned its plan to open full-scale retail outlets in India and dissolved its partnership with Bharti. International supermarket chains’ “passive and even negative reactions to the second round of retail liberalisation in India were due partly to the strict operational requirements and continued policy uncertainties”, the Unctad said.
The National Democratic Alliance government has said it will not allow FDI in multi-brand retail. For those that have committed FDI, such as Tesco, the government will work out something later. Tesco is the only foreign company to have made a proposal to invest in Indian supermarkets.
When the government opened single-brand retailing to foreign investment in 2006, it allowed 51 per cent foreign ownership. Five years later, it allowed 100 per cent FDI in single-brand retailing. In September, 2012, the previous United Progressive Alliance government allowed up to 51 per cent FDI in multi-brand retailing.
Thanks to policy changes in 2006, annual FDI inflows to the trade sector in general jumped from an average of $60 million during 2003-05 to about $600 million during 2007-09, the report said. Inflows have fluctuated between $390 million and $570 million in recent years. The share of the sector in total FDI inflows rose from less than a per cent in 2005 to about three per cent during 2008-09. However, that declined to around 2.5 per cent in 2012, the report showed.
The report suggested that a different approach could be considered for foreign investment in the Indian retail industry, in terms of mode of entry, franchising and other non-equity forms of multinational participation. Such arrangements would allow India to benefit from foreign capital and know-how while minimising potential tension between foreign and local stakeholders, it added.
Punit Shah of KPMG said the franchise model is currently being used in India. “It’s not a bad idea but it is a sub-optimal solution. It would not promote FDI flows in the country,” he said.
Several foreign companies with strong brand names have established a presence in India through franchises. These include Kentucky Fried Chicken, Domino’s Pizza and Subway. This is the preferred route in the hospitality and food businesses.
At the global level, the Unctad report projected FDI flows to rise to $1.6 trillion in 2014 from 1.45 trillion in the previous year. The report pegged FDI flows to further increase to $1.75 trillion in 2015 and $1.85 trillion in 2016. Nazareth said even the projected FDI inflow in 2016 is way down than $2 trillion in 2007.