Even as the government is looking for raising foreign direct investment (FDI) caps in several sectors, its recent reforms on this front could not draw a tepid response in 2012-13.
The much-touted FDI reforms could not set the tone for higher inflows in 2012-13 as most sectors in the economy-- services, pharma, chemicals, power-- attracted lower overseas funds than a year earlier.
However, auto sector facing downturn saw over 60 % surge in FDI inflows in 2012-13 year-on-year. Tourism was another sector which saw three times FDI in 2012-13, though it still remained low at $3 billion.
Overall, the inflows plunged 38 % in 2012-13 as the country attracted FDI of $22.4 billion as compared to $35.1 billion in 2011-12, showed the data given by the Department of Industrial Policy and Promotion (DIPP).
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The Government took several measures since the middle of September last year to open FDI in certain sectors and also raise the cap on others (see inbox).
However, economists felt that it is too early to judge those numbers on the basis on the reforms taken by the government in the recent times. “Reforms don’t mean that investment scenario will suddenly change. It would take time to reflect as it is a gradual process. In next 3-4 years, we could witness an increase of around five billion FDI inflows”, said D.K.Joshi, Chief Economist at CRISIL.
For the year 2012-13, the Government has projected the FDI inflow of $36 billion.
The major share of FDI inflows comes from services sector (sans telecom), which declined 7.3 % to $ 4.7 billion in 2012-13 from $ 5.2 billion in the previous year. Experts believed that global economic slowdown is letting the FDI in services sector down.
The country being one of the biggest markets for generic drugs saw a decline of 65.2 % in foreign inflows to $1.1 billion from $3.2 billion in 2011-12.
Generic drugs are allowed 100 % FDI through the automatic route in green-field projects while for brown-field projects, approval has to be sought. FIPB, in the recent times, has stopped clearing any proposals for brown-field acquisitions. Officials told Business Standard that around 48 proposals are held back by FIPB, which led to low FDI inflows.
Moreover, recently, the finance ministry was asked by the DIPP not to clear FDI proposals in pharmaceutical sector as it was reviewing the FDI policy. This could further shut the doors for potential investors like Mylan Laboratories and Medreich whose proposals were cleared in the recent FIPB meetings.
Chemicals, excluding fertilizers, which contributed 11.5 % to the total FDI inflows in 2011-12, saw the biggest decline by 93 % in 2012-13. Industry experts blamed it on poor investment sentiments due to infrastructure bottleneck, comparatively high power cost, long waiting hours for ships at ports.
FDI in the power sector contracted 67 % to $536 million from $1.6 billion. Big firms like Hong Kong-based China Light & Power (CLP) are reconsidering their investment plans. They have been incurring losses due to lack of coal supply and natural gas supply to its power plants.
FDI in Telecom sector -- which faced rough times due to cancellation of telecom services last year in 2G spectrum case and government’s harsh policies on investors such as retrospective tax laws -- also plugged 85 % to $304 million in 2012-13 from $2 billion in the previous year.
The biggest jump in the FDI inflows number was witnessed in the hotel and tourism sector which saw a rise of 228% to $3.2 billion in 2012-13 from around $1 billion previous year.
“The easy entry and exit of foreign players in India and liberal FDI norms in hotel and tourism sector are the main cause for this huge jump”, said Kaushik Vardharajan, Managing Director of HBS India, a hospitality consulting firm. Dutch firm APG pension Funds' invested $130 million in Lemon Tree Hotels, Intercontinental Hotel Group invested $30 million dollar in a joint venture with Duet last year for opening 19 Holiday Inn Express hotels by the year 2015-16.
Automobile industry also saw a magnificent rise of 67% to $1.5 billion from $923 million. This is the highest FDI inflows in this industry for last six years, according to DIPP’s FDI database. According to a report by International Science Commerce Association (ISCA) in February this year, 53% of these inflows come from the passenger vehicle segment.
The major contributions came from Ford which announced to set up its second facility to the tunes of $40 billion in Gujarat, Toyota Kirloskar Motor which invested $9.9 billion across its two units in Karnataka and Hyundai Motor India announced investment of $ 300 million at Chennai last year. But recent trends in the automobile sector do not look promising as the auto sales dipped around 5% in May this year as compared to corresponding period last year.
Many investors even after nine months of setting reforms in FDI in multi-brand retail are awaiting clarification from the government. The broader sense is that till the time there is no transparency in the reform measures, the investors can still be hesitant to invest in the country. "There won’t be much change in the FDI inflows and would remain the same because of political uncertainties. Nobody is expecting a big uptake in the economy. Hence, there would not be a drastic impact on FDI in the recent times", said Anil Talreja, Partner at Deloitte Touche Tohmatsu India Ltd, an accounting and consultancy firm.