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FDI spurt belies affirmation on ‘Make in India’

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Mr.Dhananjay Sinha

Head of Research and strategist.

21 Oct 2015

The recent media hype over India surpassing China and US in FDI inflows, is supposedly considered an affirmation of the success of “Make in India”. The 'Make in India' twitter handle (https://twitter.com/makeinindia/status/652387763476496384), has used this data to project evidence of success of this initiative. Accordingly, India is cited to have surpassed China and the US in FDI inflows, with a greenfield FDI inflow of USD 31bn in the first half of 2015, an impressive 47% YoY jump over the USD24bn FDI inflow in full year 2014. But is this a case of hyperventilation? It is indeed true that there has been an increase in FDI inflows (including green field and cross border M&A) into India in the hope of a turnaround in growth outlook, and this bodes well for the external sector to withstand potential BoP volatility arising from potential decline in global excess liquidity. However, we believe it will be premature to extrapolate the recent upsurge in FDI as concrete proof of a revival in the investment cycle or aiding the objectives of 'Make in India'. Further, the disaggregated data on FDI inflow and outflow (greenfield and cross border M&A) indicates a much different picture compared to the general perception. For instance, while FDI into greenfield projects in India at USD 31bn was 29% higher than China, the gross FDI inflows into China at USD 43bn, including M&A flows, was actually 65% higher than USD 26bn into India. Available information for India shows that gross FDI flows, after deducting repatriation/disinvestment grew by a modest 15.6% YoY in 1H2015. This is lower than the impressive 2.6x expansion for greenfield projects. Significantly, repatriation/disinvestment for India in 1H2015 shot up by 79% to USD 56bn, compared to USD 31bn in 1H2014. China’s lower net FDI is due to higher investments abroad. Our analysis also suggests that FDI inflows in Indian have centered on exploiting domestic consumption; rather than stimulating domestic manufacturing it is likely to have catalyzed imports. The profile of recent FDI flows is indicative of investments done to tap the domestic consumption rather than to boost exports. Substantial inflows in the last two years have been in the areas of e-commerce, automobiles and cash & carry. Employment intensive sectors e.g. construction, have seen sharp decline. Likewise, conventional manufacturing/ investment oriented sectors such as metals, power, oil and gas have seen muted flows. FDI investment in the automobile sector is mostly aimed at targeting domestic demand. Nearly 50% of the top private equity deals in 2014 were in consumer technology, which experienced CAGR of ~140%. However, we believe that with majority of such investments going into growth and initial phase of funding with valuations getting expensive, there is a possibility of flows diminishing, going forward. Rather than encouraging manufacturing, e-tailing investments in turn, have fuelled imports of consumer electronics. Clearly, in our view, such flows cannot be considered aligned to the spirit of the “Make in India” campaign.In contrast to India’s over indulgence with FDI flows to resuscitate domestic investment cycle, global trends since 2007 show a consistent decline in the relevance of FDI & other external flows in funding investments. The share of FDI to world gross fixed capital formation (FDI/GFCF) has declined from its peak of 14% in 2007 to 9%. In India, it has declined from 11% to 5%. As a corollary, it appears that extraordinary global monetary easing has inflated financial markets, including EM Asia and LatAM, rather than aiding real investments. This explains the dichotomous trend between valuations and earnings growth. In absence of FDI flows, we believe that EMs are likely to be more susceptible to potential global liquidity crunch. Decline in global savings rate makes revival in domestic savings critical for investments, especially in India, where elasticity of Investment rate on savings rate greater than unity.Global FDI activities (inflows and outflows) have slowed recently, particularly in developed economies, even as EMs, particularly China and Hong Kong, have remained resilient. Global FDI inflows have considerably moderated from USD4.0tn to just USD4.0bn in 2014. As an investing country, US has seen a sizeable decline from USD3tn in 2013 to just USD100bn in 2014. Europe has seen retrenchment/disinvestment on both sides (inflows & outflows). Net FDI flows into China averaged ~USD 1bn for the 12 months ending Aug-2015, much lower than USD 2.9bn for India. While truncated data like these may have prompted some to conclude that India trumped China, if we consider only the inflows, China has consistently maintained gross inflows of ~3.6x that of India. Importantly, China has been growing its investments abroad over the past several years, growing at 27-30% since 2009, possibly diversifying fixed investments across other parts of the world.Our analysis of FDI flows supports our earlier thesis of expecting improvement in urban consumption; positive for automobile on the back of new launches in passenger cars. Higher data usage could be a positive fallout for telcos; imparting some respite against other constraints faced by the sector. Proliferation of consumer technology could continue to be disruptive for the organized retailers in the foreseeable future. Based on our analysis we are still not convinced to change our precautions stance on the capital goods sector.

Exhibit 1: Recent upsurge in FDI flows dominated by decline in FDI outflows from India (USD bn) Source: RBI, CMIE, Emkay Research

Please see attached file for data for the above exhibit…