India is 2nd most preferred destination for foreign investors: Ernst & Young Report

 The Indian economy successfully weathered the global financial crisis, thereby, proving its resilience and depth, suggests Ernst & Young report titled, ‘Doing business in India’. The report explores India’s key sectors, investment climate, funding scenario, laws and regulations, to aid companies that are doing, or plan to do business in India.

The study highlights that India is one of the most preferred destinations for foreign direct investment (FDI), only being second to China, who leads the chart. FDI inflow in India from FY’05 to FY’11 has risen to 31.5%, reaching a figure of INR 885 billion. Do we have comparative for any other country? Mauritius continues to be the largest source of FDI inflows into India, with the leading contribution of 36%. Services sector is attracting the maximum FDI with a figure of 18%, followed by telecommunications (8%) and automobile (7%).

The report highlights that the Aerospace and Defence industry are emerging markets in India, with the Indian military expected to spend roughly US$ 80b, over the next four-to-five years. About 65–70% of India's defence requirement is imported from global aerospace and defence companies. Automotive is another profitable sector in India for foreign investors, as it is expected that by 2020, the vehicle production is set to treble from the levels in 2009 and the size of the component sector is set to grow from US$ 30–110b. Banking is another key sector where the aggregate limit for all foreign institutional investors (FIIs) is restricted to 24%, which can be raised to 49% with the approval of the board/general body.

According to Gaurav Karnik, Tax Partner, Ernst & Young, “Over the past few years India’s average growth in GDP has ranged between 6 to 8%, which is inspiring to say the least. Despite the current global economic uncertainty, India’s GDP is expected to grow at 7.7%, which clearly underlines India’s potential as an investment destination. The fact that FDI has increased by 31.5% across major sectors further evidences the attractiveness of the Indian economy. India has a liberal FDI policy and recent announcement of liberalisation of FDI in multi and single brand retail, showcases the government’s endeavour to continue to open up India for foreign investors.”

The report further suggests that foreign investors should not miss out on Indian healthcare industry, which has evolved tremendously over the years. Indian domestic pharmaceutical market size stood at US$ 12.76b in 2010 and is expected to grow at a CAGR of 9.5%, till 2015. While, medical equipment and supplies market during 2010, was estimated at US$3.6b and is expected to reach US$ 6.41b by 2014 with CAGR of approximately 15.5%.

Indian IT-BPO is another major industry that needs the attention of foreign investors. The sector’s contribution to India’s GDP is expected to account for 7% by 2014–15; and by 2020, the sector will provide 10m direct and 20m indirect jobs. Media & Entertainment industry is projected to reach US$ 31.2b by 2015, at a CAGR of 12.8%, thus providing ample of opportunities for FDI and FIIs to plough their money in this sector.
Highlighting the Indian real estate industry, the report suggests that increasing urbanization, favourable demographics, growth of the services sector and rising incomes, are driving the growth of this industry, which should not be overlooked by foreign investors. Further, the organised retail segment is expected to grow at 22.3% annually to reach a market size of approximately US$ 57b by 2013-14.
Moving on to exports, the report highlights that the cumulative value of exports for FY11 registered a growth of 37.5% vis-a-via FY10. UAE continues to be the topmost export destination for India’s products, followed by US, China, Singapore, Netherlands, the UK, Germany and Hong Kong.

Gaurav Karnik added, “India’s export sector has exhibited resilience and dynamism in recent years. Reform measures and policy initiatives have gradually developed India’s export prowess. Most goods can be freely exported from India, except for a small number of prohibited items. The country accounts for approximately 3.7% of the global export of commercial services. The new manufacturing policy aims to create 100 million jobs and increase the share in India’s gross domestic product to 25% by 2022, from a present figure of 16%, which in turn could result in India being a global manufacturing hub for many companies.”

On the other hand, the study suggests that India’s key imports include petroleum, electronic goods, machinery, gold, pearls and semi-precious stones. China has the largest share in India’s imports, followed by UAE, Saudi Arabia, the US and Switzerland. The cumulative value of imports for FY11 was US$ 350.69b as against US$ 288.37b in FY10, registering a growth of 21.6% in Dollar terms.