Hurdles To FDI To Linger Even After Elections


BMI View: We believe that even with the potential for a business-friendly election outcome, foreign direct investment (FDI) into India is likely to remain subdued for the coming fiscal year 2014/15 (April-March). Domestically, high levels of bureaucracy and continued disagreements between state and central governments will only increase risks for businesses looking to invest in India, keeping them on the sidelines despite efforts to liberalise the Indian market. Moreover, given that around a fifth of FDI inflows into India are into sensitive sectors such as pharmaceuticals and computer technology, we note that disagreements between governments could pose further downside risks to India's attractiveness.

We believe that foreign direct investment (FDI) inflows into India in FY2014/15 will likely to remain subdued despite our view for the business-friendly opposition Bharatiya Janata Party (BJP) to win the upcoming parliamentary elections in April-May. Current FDI inflow for the current fiscal year FY2013/14 up to January has been lacklustre, coming in at US$18.7bn versus US$19.1bn over the same period in FY2012/13. At these levels, the amount of inward FDI received for FY2013/14 could turn out to be one of the lowest in the past seven years.

We expect two domestic factors to prevent a strong resurgence of FDI; the high levels of bureaucracy and continued disagreements between state and central government over policy priorities. Moreover, we highlight the risks that disagreements with foreign governments may pose to FDI inflows, given that at least a fifth of FDI that India receives goes into high-tech and sensitive sectors. Failure to address these issues by Indian political leaders could see investors remain on the sidelines. The lack of FDI could leave India more dependent on shorter-term portfolio inflows to finance its current account deficit, which would, in turn, leave the Indian economy more vulnerable to global sentiment.

Hurdles To Prevent A Return To Previous Peaks...
India - FDI Equity Inflows, US$bn

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Related sectors of this article: Economy, Balance of Payments
Geography: India