As analysts hail India as the next new market to become a global player, what are the opportunities and challenges faced by foreign investors?
The typical downers announced by skeptics: While annual GDP growth has averaged 6.5% for the past decade, India is still plagued by the country's "social deficit" of a third of its people living in poverty.
Plus, FDI flows are about a tenth of those inundating China.
But perhaps the picture is not so dire. The International Finance Corporation suggests the gap is narrower between China and India. Applying a standard measure of FDI, the IFC estimates that China's inflows on average may halve to $20 billion a year while India's more than doubles to $10 billion, reports International Risk.
Restrictions that made foreign investment difficult have gradually been lifted. In 2004, foreign direct investors were permitted 100% equity ownership in 12 industries, including pharmaceuticals, hotels, real estate, non-banking finance, power, roads, ports, mass-transit systems and in the development of special economic zones; up to 74% equity ownership in mining, telecoms and airports, and 49% in banking, insurance and aviation.
In a parallel move, Indian companies were allowed to borrow up to $500 million a year overseas to acquire assets or invest in foreign joint ventures.
"That represents a tremendous vote of international investor confidence in an economy that until just 15 years ago was crawling under its Soviet-inspired planners," says Steve Vickers, president and CEO of International Risk Ltd. International Risk is an organization that provides, political risk analysis and business intelligence on emerging markets and has been focusing on the India market recently.
Vickers also noted that with over $140 billion in foreign reserves, the government is now confident enough to permit Indian companies and individual to buy more foreign currency in the domestic market to acquire capital assets abroad - which could mark the first steps towards making the Indian rupee convertible.
So if the investment picture in India isn't that much different than in China - what are the remaining risks? Vickers says it's much as in the rest of the developing world: from regulatory and legal concerns, political uncertainty, questionable infrastructure, labor and environment issues to the inevitable costs of pervasive corruption.
Encouraging isn't it?
There are indeed bright spots. The stock market has been transformed, to what Vickers describes as "a proverbial den of thieves to some of the most transparent automated and well regulated in the world - with record foreign institutional investment inflows a testimony to this."
The Delhi Metro was constructed in record time, which won the Indian builder global consulting and construction contracts. The regulation of the telecoms industry has given the Indian consumer some of the cheapest call charges in the world. And the reform of banking has reshaped the financial services industry to enable Indian companies to become global players.
"In short, provided companies take appropriate action to address the risk accordingly and conduct robust due diligence - India works," says Vickers. "It represents a huge opportunity for the investor who has an appetite for detail, is patient and looks to the long term."
