India remains an attractive investment destination

16 December 2016 Consultancy.in

India remains an attractive destination for Foreign Direct Investments, having seen around $34.4 billion enter the economy in 2014 according to research by Arthur D. Little. Much of that money (10.5%) goes towards investments in services, followed by telecommunications (9.4%). Although the majority of investors are more positive about India's economic development than they were last year, barriers remain in the form of infrastructure and government legislation.

Foreign Direct Investment (FDI) generates considerable benefits to economies towards which it flows. Externalities such as better business models, processes, technologies, training and best practises are stimulated through such investments. FDI also tends to bring with it job-led economic growth, something which emerging economies are keen to capitalise on. FDI remains critically important even in well developed economies such as the UK, which still sees considerable inflows according to a recent Grant Thornton report.

Recent research by Arthur D. Little, in collaboration with the Associated Chambers of Commerce of India (Assocham), titled ‘India - Investment Opportunity’, explores FDI entry into India as well as the sentiment of investors in the Indian economy. The report is developed from an analysis of the Indian market as such, and is complemented with the answers of more than 100 investors and business leaders in India and internationally about their current perception of the Indian economy.

FDI heat map

Global FDI

The good news for India is that its FDI inflow has seen an increase of $9.1 billion, from $25.3 billion in 2007 to $34.4 billion in 2014. Other big winners have been China, where FDI increased from $83.5 billion to $129 billion, and Brazil. In particular, developed economies have seen considerable decreases in FDI. The UK is down almost $110 billion since 2007, while Japan lost 90% of its FDI over seven years.

The increase in inflow is positive for the expansion aims of India’s long term economic plans since the country is now in need of both domestic investment as well as FDI. The country’s savings and investment rates were between 600 and 800 basis points lower in 2012 & 2013 compared to 2007 & 2008; the result of poor natural resource utilisation and labour productivity. According to the report, FDI is a must to bring about the much needed investment in the economy.

FDI inflow and FDI projects

Indian FDI

In terms of a breakdown of FDI in India, the last three years show a relatively mixed bag. 2013 was a low year compared to 2012 when the country benefited from $29.7 billion in investments. The number of FDI projects has increased since the start of Shri Narendra Modi’s government, suggesting that investors have been more confident in the country’s direction.

FDI inflow

Sector investment

The research also tracked the destination of FDI in financial year 2014-15 and finds that the largest chunk, 10.5% or $3.2 billion, was invested in the services industry. Telecommunication followed, with investments of $2.8 billion, while trading amounted to $2.7 billion or 8.9% of the total. Services such as computer software & hardware and auto also attracted significant FDI inflows worth $2.5 billion and $1.1 billion respectively. This, according to the researchers, showcases the positive effort of government initiatives such as ‘Make in India’ and ‘Digital India’.

The largest inflow of money came from Mauritius (35% of the total). This is largely due to India’s Double Taxation Avoidance Agreements with Mauritius. Singapore is the second largest investor source (14%) and the UK, the erstwhile colonial power, comes in third with 9% of total.

Investor survey

Investor sentiment

To find out what investors think about investing in India, Arthur D. Little asked more than 100 investors and business leaders about their current perception of the Indian economy. The majority (51%) of respondents are positive about the country’s outlook compared to a year earlier, while 34% are seeing the future to be bleaker. The qualities of the Indian economy most affecting respondents are the domestic market at 41%, technical talent at 30%, new government incentives at 17% and investor protection at 12%.

The country’s poor infrastructure is seen as the biggest barrier for FDI investors (31%), followed by tax complexity (19%) and government regulations (16%).

Investor survey - part 2

The most concerning macroeconomic features are high interest costs as cited by 39% of respondents, while real GDP growth is a concern for 19%. The biggest concerns investors have in the Indian economy are legislative delay, cited by 37% of all respondents, followed by poor infrastructure (21%) and the high cost of capital (17%).

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Public and private innovation are driving India's substantial digital economy

01 April 2019 Consultancy.in

New analysis from global management consultancy McKinsey & Company has reinforced what many experts have been indicating in recent times, that India is amongst the largest digital economies in the world. On a number of metrics, India is second only to China in terms of digital consumption.

The analysis comes against the backdrop of reports from a number of major consulting firms about India’s rapidly digitalising economy. In 2017, the Boston Consulting Group placed India’s population of online users at approximately 400 million, and predicted that it would reach 850 million by 2025.

Since then, experts have focused on what the emergence of such a large digital market means for various sectors, and how they are likely to grow and evolve in this context. McKinsey’s latest study offers a comparative analysis of India’s digital market against other major economies in the world.

India's global digital position

The highlight of the report is the role that the Aadhaar initiative from the Indian government has played in the development of this digital economy. Aadhaar was launched in 2009, and is essentially a digital identity mechanism that has registered as many as 1.2 billion people in accordance with their biometric information. 

The presence of such a digital identity has spelled growth for a number of other sectors that have fed off of this substantial database. The digital banking segment is one example. By the start of last year – nine years after the introduction of Aadhaar, nearly 900 million bank accounts were linked to Aadhaar information.

Not only does this represent monumental growth over less than a decade, but the number also nearly doubled since the previous year, when the number of linked bank accounts stood at just under 400 million. The digital identity database generated under Aadhaar has grown into the largest of its kind in the world.

Global digital adopters

The report attributes the overall digital growth in the country to a number of other government initiatives as well, including the Goods and Services Tax that was established in 2013, and has created a unified and harmonized database for over 10 million firms that pay indirect tax to the government.

Consequences of this expansion in the digital sphere have spread far beyond the sectors most directly affected, and India has become the second largest digital economy in the world behind only China on a number of metrics. These include the number of application downloads as well as the number of wireless phone subscribers.

The latter has been the result of the Reliance Jio initiative, which has tremendously increased the accessibility of mobile data by offering extremely cheap data plans across the urban and rural landscape. The number of internet subscribers has also grown to the second largest in the world as a result, currently at 560 million according to McKinsey.

Falling data prices in India

Increased prosperity has also led to a boom in the number of smartphones being purchased in India, currently at nearly 355 million in India, behind only China. The same global position is applicable when comparing the volume of social media engagement in India. Alongside government initiatives, the report attributes this scenario to innovation in the private sector as well.

“Global and local digital businesses have recognized the opportunity in India and are creating services tailored to its consumers and unique operating conditions. Media companies are making content available in India’s 22 official languages, for example,” says the report.