FDI into India: $30 bn and counting

The year 2005 will go down as the one in which FDI announcements worth a staggering $30 billion (about Rs 135,000 crore) were made during the year -- an all time high.

Though this is only half the FDI of $60 billion (about Rs 270,000) that China actually received during the year, there is no doubting that multinationals have finally started queuing up to put their money in India.

As a signal of what is to come, India has displaced the US as the second most favoured FDI destination, after China, in AT Kearney's FDI Confidence Index.

In comparison with the numbers announced, though, the actual flows of FDI are still modest. According to investment analysts, the calendar year 2005 will end with actual inflows of $6.5 billion (about Rs 29,000 crore), up from $5 billion (about Rs 22,000 crore) in 2004.

The new year promises to be better, as the Manmohan Singh government is expected to further liberalise the FDI regime.

"In 2005, there was a lot of debate on raising the FDI caps in various sectors but only real estate and telecom happened. In 2006, we expect more sectors to open up, including retail," says Rajiv Memani, country managing partner and chief executive, Ernst & Young in India.

A group of ministers has been formed, meanwhile, to suggest the simplification of foreign investment norms. It is expected that FDI in retail will be announced in the first quarter of 2006.

According to analysts, if foreign retail chains are allowed to take up to 51 per cent in local ventures, India would attract over $1 billion (about Rs 4,500 crore) within 12 months.

Meanwhile, investment decisions have been announced one on top of the other, through the whole of 2005. South Korea's Posco became a household name by signing an MoU with the Orissa government to invest $12 billion (about Rs 54,000 crore) in a steel plant. Not to be left behind, the world's biggest steel maker LN Mittal announced his maiden venture in India, in the form of a $9 billion (about Rs 40,000 crore) plant in Jharkhand.

Then came the techies. Software giant Microsoft announced its intent to pump in $1.7 billion (about Rs 7,600 crore), its largest investment anywhere outside the US. And leading chipmaker Intel unveiled plans to invest $1.05 billion (about Rs 4,700 crore).

Rival chipmaker AMD did even better by saying that it would pump in $3 billion (about Rs 12,500 crore). A little earlier, Cisco chief John Chambers made his visit to India memorable by announcing a $1.1 billion investment (about Rs 4,800 crore). The tech total from just four announcements today stands at $6.85 billion (about Rs 31,000 crore).

In automobiles, Suzuki, now fully in control of Maruti Udyog, decided to set up a diesel engine plant in Haryana, which will absorb no less than $800 million (about Rs 3,500 crore). That as well as the steel projects signal the new-found confidence in India's competitiveness as a manufacturing base. Automobile companies have decided to open up an India presence, and companies like Hyundai are rapidly expanding capacity.

"In terms of the investment climate, India offers a good opportunity," said Kiran Rao, senior vice president, marketing, Airbus Industrie. Agrees Sandeep Singhal, managing director, WestBridge Capital Partners: "A lot of money is looking to come to India in the next 12-24 months."

Bigger money will come in if and when the FDI guidelines in the financial sector (banks, insurance and pension) are changed. A senior US embassy official told Business Standard that the financial sector had the potential to attract the maximum investment from the US companies.

However, getting the Left parties to approve greater room for foreign investment will require extreme dexterity. "On insurance, we have told the government that it cannot bring a Bill in Parliament," says Communist Party of India-Marxist General Secretary Prakash Karat.

But hasn't the Left Front's stand softened, with the prime minister holding consultations with them? "On FDI, our stand has not changed. The prime minister has not consulted us at all on FDI. We met the finance minister on pension and public sector disinvestment. I don't know if there was a breakthrough in the meeting, but our stand remains unchanged," says Karat.

The Left's roadblock apart, the question is whether promises will turn into projects on the ground. Jharkhand Chief Minister Arjun Munda is hopeful that within two years, money will start coming in for at least half the projects announced in his state.

Even a 50 per cent success rate on the promises that have been made, would be better than what India has done so far in attracting FDI flows.

<b>Anticipated triggers in 2006 </b><br>

<li>  Opening up of retail<br>

<li>  Higher ceiling in insurance<br>

<li>  Opening up of  other financial services<br>

<li>  Simplification of procedures<br>