Investor confidence in the Indian market dips slightly after policy reforms

07 May 2018 4 min. read
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Much like domestic investor sentiment, confidence in the Indian market amongst foreign investors has also faltered since the comprehensive policy reforms introduced over the last two years. This year, India has fallen out of the top ten on A.T. Kearney’s annual Foreign Direct Investment Confidence Index (FDICI) – for the first time since 2015.

Each year, management consultancy A.T. Kearney conducts a survey of business executives across the globe to gauge investor sentiment, and to identify key trends and patterns. The index differentiates itself from other such measurements by the fact that it paints a rough picture of the near future by extracting responses about plans for the next three years.

As a large and increasingly prosperous consumer market, India often finds itself amongst the top countries on the index. According to A.T. Kearney’s Global Chairman Johan Aurik, alongside the large population and the size of the GDP, India’s attractiveness as a market has been significantly boosted by the pro-business policies introduced by the Modi administration since 2014.

This policy impact has manifested itself on the index, given that India has placed in the top ten countries since 2015. However, the last two years have seen two other policies being introduced in India, namely the demonetisation drive in 2016 and the introduction of the Goods and Services Tax (GST) in 2017, both of which have had their share of influence on the market.

2018 FDI Confidence Index

Demonetisation took place in 2016, when the government abolished India’s two highest currency denominations to nullify the large volume of black money being hoarded across the country. The GST, which was introduced last year, reformed the entire taxation system in India to make it a more simplified and streamlined process.

Both policies are expected to be highly beneficial in the long-term, but have posed significant economic challenges in the short term, not to mention the extensive social and political backlash. The start of 2017 was a gestation period of sorts for both policies, and saw considerable dips in major indicators such as GDP and IPO activity.

While the economy eventually demonstrated signs of recovery by the end of 2017 – continuing into the early parts of this year – the economic scenario over the course of the whole year dampened the previously soaring investor sentiment in the country.

This year’s index from A.T. Kearney has confirmed that a similar dip in sentiment has been registered amongst foreign investors in the Indian market. At the start of last year, India’s score on the index was 1.68, which placed it in 8th position in the global ranking, well ahead of other developing economies.

Investor sentiment over the next three years

In 2018, India has placed 11th in the global ranking, dropping out of the top ten for the first time since 2015 and registering a dip in score to 1.56 points. The consulting firm attributes the dip to the GST and demonetisation, but also recognises the short-term nature of this dip, and applauds the other policies that the administration has introduced.

Pro-business policies such as the establishment of the Foreign Investment Promotion Board and the ‘Make in India’ campaign have pushed India into the top 100 on the World Bank’s ease of doing business index. As a result, the survey revealed that investors in the Americas, particularly those in the manufacturing segment, have ranked India first as their intended destination for investment.

As a result, investor sentiment for the next three years is fairly mixed. Compared to one year ago, 33% of global executives are more optimistic about India’s outlook for the next three years, which has increased from 31% last year. On the other hand, the number of executives who are more pessimistic about the next three years has also increased from last year, from 16% to 18%.

At 18%, India’s ratio of pessimists compared to last year is the highest in the top 20 countries on the index, which highlights room for improvement. Meanwhile, the US ranked first on the index for the sixth year straight, as global firms try to gain a foothold in the rapidly internalising market.