How to attract the money to India

How to attract the money to India

We need foreign investment, not in billions but trillions of US dollars, and can absorb it all. Of course the bulk of this appetite is for massive infrastructure creation and upgrades, and in the defence/nuclear power sectors, which are all very capital intensive.   

What works for us is the size and vitality of our domestic market which keeps our economy going.  This is also what makes India attractive to the global market which is largely saturated and stagnating in most of the advanced nations. But not even the most optimistic would- be foreign direct investor, going into brick and mortar businesses here, can expect quick results in India.

For most of the last decade and more, the bulk of the foreign money has come into the stock market as FII (Foreign Institutional Investment), because of its relative liquidity. But this is now much diminished, and consequently putting pressure on our foreign exchange reserves position as well as the value of the rupee. Our equity markets are not doing well with the economy slowing down. And there are only limited returns possible from our debt investments. Besides, the Government has placed caps on how much foreign money can be investment in the debt instruments too.

When it comes to FDI (Foreign direct investment), the major stumbling block is our own attitude. Despite the opportunities, both of circumstance and timing, staring us in the face, in practically any direction one cares to look, the Indian demand is only partially met at best. While everything is no longer in acute short supply as it was through our socialist years, we are far from the standards expected in a developed country.  We are not even up to the level of most other emerging economies, even though we probably have the greatest potential of them all.

Basic amenities continue to be in inadequate supply everywhere, and our capital New Delhi, probably better off than any other city in the country, still suffers from chronic electricity, water, sanitation, security, transport, housing, schooling, medical and other shortages.

As for the rest of the country, it is many times worse off. This is despite substantial improvements made over the years, but too gradually to have made more than a dent against the surging demand. And yet we aspire very clearly, if in the abstract, to join the leading rank of nations.

Despite being in urgent need of progress, we routinely lay down insulting and unrealistic conditions and codicils, as if we are still working for a colonial administration. We behave supremely confident owing to a conventional hubris that the world will meet our unreasonable conditions to gain access to our markets. Instead, most of the world refuses to play ball, preferring to go to smaller opportunities on more favourable terms, elsewhere.

 And those who do agree to our rules, happily flout or renege on the conditions they feel were unfairly imposed on them as a price of entry. We are hardly in a position to enforce our will in the international context, and possess very limited diplomatic clout, as is seen often enough. We would therefore be much better served if we made ourselves more attractive and welcoming as an investment destination.

In the midst of this characteristic bureaucratic obtuseness and political bungling of our prospects, the recent easing of conditions for single brand retailers wanting to come to India is most encouraging.We now allow 100% foreign ownership of single brand retail entities with no minimum investment threshold, unlike the 51% allowed in multi-brand after so much difficulty. And most significantly, we no longer insist on 30% of the single brand sourcing to be done in India from small players.  

Multi-brand is still largely a non-starter, till we further sweeten the conditions imposed, such as the minimum USD 100 million investment requirement. And till the virulent political opposition to it in many quarters abates. Making it possible for each state to let   in multi-brand or not as they please tends to spoil the plans the investors may have for the country as a whole.

 At present multi-brand players in India, such as Walmart, Carrefour, Metro, Tesco and Woolworth prefer their wholesale operations, where they are allowed to run cash-and-carry operations without any controversies, and own their enterprise outright.

In single brand however, by not insisting, we may have done ourselves a favour for once. Many foreign retailers may want local support on their own, either via consultancy, or outsourcing, or through joint ventures, but this is now up to them. Besides, once on the ground, they tend to end up manufacturing and exporting from India in due course, just as the automobile sector does, and source many components locally as the time goes on.

 This sort of backward integration will happen naturally because it makes good business sense. There are very few items or components that can be economically manufactured in the West today, but innovation and design continues to be a strength. So while things may come into this country made in China and other parts of South Asia to an extent, the lateral benefits that will permeate to the Indian work force will be, first of all, necessary employment, despite a high level of mechanisation, and a raising of standards and methods generally.  There will also be a greater sophistication and know-how in merchandising and marketing acquired as a by-product. The consumer will have greater choice and higher quality, very often at competitive prices.

The Indian retail market is estimated to be worth over USD 450 billion already, and is amongst the fastest growing in the world.  We cannot grow it by ourselves quickly to double its size, necessary to   meet pent-up demand, but with a gush of FDI we can.

IKEA, the world famous Scandinavian furniture maker, wants to bring in some Rs. 10,000 crores to start 25 stores in multiple locations, along with its own branded cafes and back-end infrastructure. IKEA’s proposal, with a series of subsequent applications from the company, is awaiting a final nod from the Indian Cabinet.

And the biggest single effort which has been passed since, is from French sporting goods reseller Decathlon, one of the biggest in the field, with an investment of Rs. 700 crores. This has been recently cleared by the FIPB. 

Others, like Fossil have won approval to make smaller investments. Several other big players, such as USD 3 billion worth leather goods major Coach Inc. from the US, and coveted branded fashion house Balenciaga of Spain, with substantial India plans, are waiting in the wings. So, how quickly can India ramp up the foreign investment in single-brands?

(1,104 words)

February 15^th, 2013

Gautam Mukherjee