Global FDI inflows to fall, but India may still shine

Sanjay Jog
Posted: Saturday, Apr 26, 2008 at 2356 hrs IST
Updated: Saturday, Apr 26, 2008 at 2356 hrs IST

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14 FDI proposals worth Rs 826 crore cleared

Mumbai, Apr 25 : There will be modest and temporary decline in global foreign direct investment (FDI) inflows in 2008, on the back of slowing mergers and acquisitions (M&As) activity, before a resumption of steady growth in 2009-11. A report by the Economic Intelligence Unit (EUI) titled “World Investment Prospects to 2011 :FDI and the challenge of political risk” released on Thursday, said the recent global financial turmoil would have only a limited impact on FDI flows, primarily through a dampening impact on cross-border M&As. EIA has done the analysis of detailed five-year forecasts for 82 leading FDI recipient countries of investment and market trends.

However, on India, the report said the country’s potential to attract increased FDI inflows is vast, although poor infrastructure, excessive bureaucracy and interdepartmental wrangling would slow the pace of opening in many sectors. Sectors like infrastructure, energy, telecom, IT and insurance sectors are likely to be the main magnets for FDI. Producers and assemblers of cars and automotive components are also re-evaluating India’s potential, as are biotchnology firms. The establishment of special economic zones, in which 100% foreign ownership is allowed, in order to promote exports should attract increased FDI inflows into export oriented industries.

The report claimed that the government’s privatisation programme accelerated in 2003-04 with the sale of shares in major car and oil companies, but since then has stalled owing to opposition from the Left. Despite this, the report has said India’s rank for 2007-11 would improve to 54 compared to 62 in 2002-06.

The report mentioned that China would remain by far the main recipient of FDI flows, with almost 6% of the global total and 16% of projected inflows into emerging markets.

Investors are bullish about the medium-term global FDI outlook, and appear to be sanguine about financial risks. However, the report also reveals hightened political risk perceptions among investors. This is especially so for emerging markets, where all four forms of political risk (risks of political violence, FDI protectionism, and threats associated with geopolitcal tensions and governmental instability) are seen increasing in the next five years. For developed countries, there is concern about rising FDI protectionism, the threat of terrorism in the US and the UK and about the impact of geopolitical tensions, ranging from the effects of possible conflict with Iran and islamic radicalism, to Russian-Western frictions.

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