LONDON, 10 December 2007 - The high GDP growth countries such as India, like the other BRIC (Brazil, Russia and China) countries, are attracting much attention from investors, including those from the Middle East and GCC (Gulf Cooperation Council) countries. But the huge pent-up demand in the GCC for investment opportunities in the world's most populous democracy, however, stresses some GCC bankers who know that it may not be that easy to realize because of constraints and barriers to business and investments there.
GCC investors, including Islamic investment funds, are especially targeting real estate investment opportunities in India. Bahrain-based Gulf Finance House (GFH) in October raised over $630 million in equity from GCC investors in a placement to fund the development of Energy City India. The issue was oversubscribed by almost 60 percent.
According to Esam Janahi, chairman of GFH, "The success of the exercise to raise equity for Energy City India underscores the strong appetite of our clients for opportunities in India as well as the success of our Energy City Qatar project. Global investors have been eyeing India for some time and are looking for opportunities to invest in India's economic development, particularly after the reforms introduced a few years ago. There is no doubt that the Indian economy is dynamic - you only have to visit India regularly to see the country is changing. With foreign direct investment now allowed automatically in certain sectors of the economy, we see the next few years as an opportune time to invest in more projects that help build the economy of India."
Several other banks have or are in the process of launching investment funds targeted at assets in India, including an Islamic real estate fund by Kuwait-based Gulf Investment House. Sourav Kumar, head of sales and marketing for Middle East, Prudential Asset Management, concurred that "we have investors who now want to invest in Shariah-complaint stocks in India, China and Asia. They are also looking for Shariah-compliant real estate assets, funds and projects to invest in. We are in the process of structuring a number of products geared towards Asian asset allocation."
However, bankers such as Ali Al-Ghannam, head of International Real Estate Department at Kuwait Finance House, one of the most aggressive GCC investors in Asia, warn that India needs to dramatically improve its basic infrastructure, transport links and its notoriously cumbersome bureaucracy if its is serious about attracting huge inward FDI flows from the GCC.
India is a dichotomy with a first world economy operating side-by-side with a Third World one. Inevitably, there will always be tensions between the free marketers and the state controllers. The Indian middle class, for instance, is set to increase from the current 150 million to over 400 million by 2011. This together with spiraling domestic demand, say bankers, will ensure the economy continues to grow at a healthy rate. The aspiring middle class will ensure India becoming a magnet for high-end global consumer goods, as already evident by the proliferation of Western style shopping malls springing up in the main metropolitan cities in India.
On the other hand, FDI, has been concentrated in the southern and western states, where more reform-minded administrations are in power. The top five destination states for FDI in recent years have been Maharashtra, Delhi, Tamil Nadu, Karnataka and Andhra Pradesh.
The main impediments to growth and investment are a cumbersome political system that slows the pace of reform; the lack of infrastructure due to decades of under-investment; restrictive labor practices; cumbersome bureaucracy; complex system of regulations; foreign trade regulations and exchange controls. There is a growing recognition of the problems over-regulation has caused, not least corruption. But reforms will be selective, slow and intended primarily to benefit Indian companies.
But all the major Indian political parties agree that economic reforms are imperative especially in a rapidly-changing and globalized world. This process was started by the previous BJP government and has become the mainstay of the current UPA administration. The ruling United Progressive Alliance coalition, led by the Indian National Congress, headed by Premier Manmohan Singh, is boosted by a booming economy growing at an impressive 8 percent average annual rate.
The next general elections in India are due by May 2009, and it is likely that the UPA will be returned to power on the back of its handling of the economy, which is growing at a phenomenal rate with real GDP growth projected at 8.4 percent for the year ending March 2008, moderating to 7.9 percent in 2008/09. However, economic liberalization will be slow though steady with privatization effectively coming to a halt because of the government's caving in to left wing factions in the ruling coalition.
The further downside is that strong domestic demand and supply-side bottlenecks will result in high inflation, averaging 5.2 percent a year in 2007-11. Similarly, consumer demand will lead to a greater trade deficit, though surpluses on services and transfers will limit the current account deficit to less than 2 percent of GDP in 2007-08. Indian exports and imports totaled $123.2 billion and $184.4 billion in 2006 respectively, resulting in a deficit of $61.2 billion. This was largely due to higher international oil prices and to demand for industrial inputs and consumer goods.
India attracted $17.5 billion FDI in 2006, which is low by global standards. According to the Department of Industrial Policy and Promotion, offshore Mauritius accounted for 40.8 percent of FDI because of tax benefits, followed by the US and UK. While the IT and computer software sectors have historically attracted much FDI, in 2006/7 these sectors have been overtaken by services - financial services, construction, telecoms, and transport. The IT industry, however, will need to move up the value chain, and the agriculture sector, which employs the bulk of the population, will need to increase efficiency and productivity.
Only last week a report published by the Federation of Indian Chambers of Commerce and Industry (FICCI) based on a survey of 321 companies in Asia's third-largest economy, warned that Indian business confidence has slumped to a five-year low on the back of flagging exports, five-year high interest rates and a rising rupee that has slowed the economy.
GCC bankers stress that the most effective way to mitigate risks and to overcome barriers in BRIC markets such as India is to partner with a quality local company, or a regional entity with vast experience in the various countries and to stick to your strengths and not to venture into unfamiliar business areas.
Operational, regulatory and legal risks are most pertinent. Operational risks pertain largely to planning approvals and project execution. India and China present the most challenging because of slow bureaucratic processes, relative corruption and a cumbersome legal system.
Emerging markets are precisely thus because their regulatory and legal frameworks are also emerging. China and India are classic cases where new regulations are introduced virtually every quarter. This is an ongoing process, and as long as a project has the proper approvals it will be protected against operational risks.
Many investors are also venturing into projects in secondary and tertiary cities as the pace of urbanization in India and China gains momentum. This is a risky strategy because rules and regulations in these cities are not as developed and as transparent as in major cities. The advice is to stick to projects in major cities.
