India grapples with its FDI genie

India, moving from problems of scarcity to headaches of plenty, is reviewing policies to deal with record inflows of foreign direct investment (FDI). The government aims to streamline investment procedures and to direct the incoming funds into areas generating more employment.
The country has overtaken the US to become the second-most attractive destination for global foreign direct investment after China, according to an AT Kearney study. Helping to attract funds are changes in the country's regulatory environment, lifting India to the rank of "top reformer" in South Asia by the Washington-based International Finance Corporation in its 2008 Doing Business 
Report, up 12 places from its 2007 rank. Even so, the country dropped a place to 32 in the report's ''Protecting Investors'' yardstick.
FDI inflows, the bulk at present going into India's stock markets, are estimated to form around 10% of India's foreign exchange reserves, which stood at US$256.43 billion excluding gold and special drawing rights at the end of October, according to the Ministry of Finance. As a pointer to potential growth, they remain a fraction of China's foreign exchange reserves - the world's largest - of $1.455 trillion for the same date.
Barely five years ago, chief ministers of leading Indian states such as Maharashtra, Andhra Pradesh, Gujarat and even communist-ruled West Bengal were staging global roadshows to attract FDI into India. Now the genie that such efforts let out of the bottle has created problems of plenty, problems that are assuming critical proportions.
The incoming funds have helped to drive up the rupee, whose gains have cost thousands of jobs due to lost export orders, particularly in the textile sector, which employs 25 million people; 36,000 textile jobs were cut in April alone.
The finance ministry is caught between financial hawks demanding that the FDI genie be let free to market forces and more prudent voices urging caution. The 1997 financial crash of Thailand is well remembered, with the collapse of the country's currency generally believed to have been caused by Thai government deciding to let it be exposed to the global market.
The FDI policy review comes as an Economist Intelligence Unit report, compiled in cooperation with Columbia Program on International Investment (CPII), says India will likely receive $20.4 billion of FDI every year from 2007-11.
The review could include opening India to more sectors such as aircraft maintenance, real estate, commodity exchanges and petroleum products.
FDI in India's real estate market alone will be worth US$30 billion, as part of a total market size of $102 billion, in the next decade, a study released on December 2 by the Associated Chambers of Commerce and Industry of India (Assocham) said. The real estate sector growth is expected to grow by more than 30% in the period.
The country's FDI inflows jumped 185% to $4.9 billion in the April-June quarter of 2007-08 compared with $1.7 billion a year earlier, with multinationals such as UK telecom major Vodafone ($801 million) and Japan's Matsushita ($342 million) leading the field. For the six months to June, FDI surged 218% to $11.4 billion from $3.6 billion in the same period a year earlier.
"Our FDI policy is perhaps one of the most liberal in the world," commerce minister Kamal Nath told the media in November. "India remains a favourite FDI destination despite what is going on in the stock market."
Nath said the government had fixed an ambitious $30 billion FDI target for the country's 2007-08 financial year (April to March) after total inflows in 2006-07 of $19.5 billion compared with $7.7 billion in 2005-06. The four metropolitan areas of Mumbai, Delhi, Chennai and Kolkata attract two-thirds of the total.
Mauritius, a tax haven, is India's largest source of FDI. Japan, Cyprus, the US and Singapore led the rest of the field. Sectors attracting most FDI attention include services, electrical equipment, transportation, fuels, chemicals and construction.
The future of India's FDI policy is attracting comment on the world stage, particularly how it is balanced against the country's strengthening currency. At a breakfast press conference in Washington on November 2, International Monetary Fund managing director Dominique Strauss-Kahn cautioned that any restriction on inflows could undermine confidence in the economy.
"One point is the transparency of those capital inflows, and we may have some concern about the distinction between investment inflows and speculative inflows," he said.
FDI in retail
The most controversial sector for investment, India's retail industry, is the country's second-largest employer after agriculture and is set for further strong growth as India's enormous consumer market increases its purchasing power. A McKinsey Global Institute study places India as the 12th-largest consumer market in the world and is heading to become the fifth biggest by 2025.
The Indian retail industry, worth $300 billion at the end of 2006, may be worth $550 billion by 2012, by which time the organized retail sector estimated to comprise around 16 per cent of the total by 2012, an HSBC Global Research report forecast. The organized retail sector is expected to be worth about $23 billion by 2010.
The growth potential has already attracted international retailers that range from Wal-Mart and Starbucks, Marks & Spencer, Tesco, Metro AG, and Liberty International to Africa's biggest food retailer, Shoprite Holdings and Singapore-based CapitaLand.
Their increasing presence is raising tensions with the country's domestic shopkeepers and traders, who face intensified competion from more-efficient incomers. Three months ago, vegetable and fruits retailer Reliance Fresh (part of the Mukesh Ambani Reliance Group) was forced to close its 37 retail outlets by the government of Uttar Pradesh, India's most populous and politically important state, after small retailers there rioted outside the company's showrooms. The state government is now studying how organized retailing could affect local traders. Its counterpart in West Bengal has also expressed opposition to organized retailers cutting out small traders.
The Indian government has meanwhile commissioned two groups - Indian Council for Research on International Relations and the National Council for Applied Economic Research - to study how the retail and agriculture sector would be affected by FDI and the entry of big corporate and industrial houses.
Ashwani Kumar, Minister of State for Industry, told India's upper Parliamentary house, the Rajya Sabha, on November 28 that the government was committed to safeguarding the interests of shopkeepers and traders.
India at present allows 100% FDI in the wholesale cash-and-carry business and 51% FDI in single-brand retailing. No FDI is allowed in multi-brand retailing. A usual entry mode for foreign players is through the cash and carry business, either directly (like Metro AG) or through partnerships (like Wal-Mart with Bharti), and through retail franchise agreements.
International retailers such as Wal-Mart, Carrefour and Woolworths are also interested in the food processing market, a sector that has trebled in value in the past two years and is expected to treble again to $326 million by 2009. To help domestic suppliers profit from the growth, the government plans a nationwide entrepreneurship development program and to directly link farmers to buyers without middlemen.
Its FDI policy also aims to help to reduce wastage of fruit and vegetables, estimated to cause losses of $12 billion annually.
Real estate
The real estate market is set to be another battleground of competing interests. Big ticket deals involving international investors are building fast in a market expected to expand by $45 billion to $50 billion in India over four years from the present $14 billion. In November, UK-based global property consultants Knight Frank Group announced a $250 million India-focused real estate fund that aims to raise investments from individuals and other investors, with an investment threshold of $10.5 million and above.
Kotak India Real Estate International Fund (KIREF) has raised nearly $200 million in its first closure with investors from Japan, the US and Europe. It aims at a corpus of $377 million.
As a sign of where investments are going, the world's biggest mall, Mall of India, is being built by the New Delhi-based DLF on National Highway 8, spanning 32 acres.
"Currently, foreign developers can undertake construction activities on a minimum space of 50,000 sq ft as a result of which the Indian real estate sector could achieve an FDI component to the extent of between $5 billion to $5.50 billion," Assocham president Venugopal N Dhoot told the media on December 2 while releasing the body's analysis of FDI in real estate.
Media
A third contested area involving FDI is the media. The Telecom Regulatory Authority of India (TRAI) has recommended allowing 74% FDI in the broadcast sector, on a par with telecommunications as it looks forward to the increased convergence of the telecom industry with other media.
Present policy allows 26% FDI in TV news broadcasters, 20% in FM radio, 49% in cable services; 49% is allowed in direct to home TV services but only 20% can be a direct foreign holding, with the rest being foreign institutional investment.
Internet service providers (ISPs) and non-news TV broadcasters are allowed 100% FDI. TRAI had also recommended 74% FDI for head-end in the sky (HITS) - a satellite-based system to distribute television signals via cable - when this system arrives in India. The same proportion is proposed for cable TV services and 100% for services downlinking general and entertainment channels delivered from outside India.
The government has agreed to the operation of 122 FM radio channels by March 2008 and has invited tenders for allotting another 97 channels. India also plans to bring out policy guidelines to regulate the content shown by service providers on Internet Protocol Television (IPTV) and to amend the Press and Registration of Books Act, 1867.

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