The rising appetite of Indian companies for global markets will result in a three-fold increase in foreign direct investment (FDI) out of the country in 2007, predicts a new study by the Washington-based Institute of International Finance (IIF).
This trend will mean that such investment from India could hit a record $3 billion (Rs 13,247 crore), the study says, while noting that FDI into India will also rise, albeit at a slower pace, to $8 billion from $6.5 billion in 2006.
The figure might appear small in the wake of frequent announcements of Indian investments abroad worth hundreds of millions of dollars by companies such as Tata Tea, Suzlon, Dr Reddy's Labs, Ranbaxy and Subex Systems, but industry analysts say this is because big deals often have debt or overseas financing components.
If the Tata Group succeeds in its bid for Anglo-Dutch steelmaker Corus Plc, the total value of that deal alone will be over $10 billion, but a relatively small fraction of the transaction price will come from within India. In the case of the Corus deal, the Tatas plan to use the acquired company as collateral to raise debt to finance the purchase.
The IIF study cites India’s booming economy as well as a rush for deals to capitalise on the market as the reason for the growth in investment into India. Meanwhile, Indian companies continue to look for business opportunities outside the country in terms of both production and new consumer markets.
IIF is a global association of financial institutions with 360 members in 60 countries. Its study also points out that India’s sustained economic growth, business expansion and buyouts have resulted in net overseas lending by commercial banks in India reaching a record $10.5 billion in 2006, but IIF expects that to ease to $9.7 billion in 2007.
The reduction is in line with what is happening across the Asia-Pacific region where net bank lending is expected to also decline, even if somewhat more steeply, to $29 billion this year from $44 billion last year. IIF expects the Indian economy to continue growing this year at the same rate as last year, or 9 per cent, though it will be accompanied by a further tightening of money supply to check inflation.
Indeed, both government policymakers and the Reserve Bank of India are grappling with inflation and a demand for money that is rising at over 30 per cent despite a recent increase in interest rates.The study also suggests that net foreign investment into Indian firms’ equities through stock markets, essentially portfolio investment by foreign institutional investors, is projected to ease to $10.5 billion in the calendar year from $11.5 billion last year. This is in line with the trend in global net private capital flows to emerging markets, which, though strong in 2006, would ease somewhat this year as global growth is expected to slow. In China, such inflows are likely to drop sharply from $32 billion to $18 billion in 2007, the report suggests.
At a global level, the report finds that the Asia-Pacific region continues to get the highest inflows, with China in the lead with over $50 billion. In terms of FDI, the favourite areas are natural resources, research and development in Asia and Europe, and services such as finance, telecommunications, and real estate. This year will, however, see the first slowdown in foreign exchange reserves accumulation in the emerging economies to $506 billion from $536 billion last year. This will happen because of a decrease in current balances and lower private capital flows.