Foreign Direct Investment (FDI) in India up 25% in 2011
London, 30th January 2012

Foreign investors see India as an attractive investment option, notwithstanding the uncertain global economic climate, according to Ready for the transition, Ernst & Young’s 2012 Indian Attractiveness Survey. The overall number of FDI projects increased by 25% to 864 (valued at US$ 50,813 million) in the 11 months to November, up from 691 projects (valued at US$ 44,874 million) in 2010. The UK emerged as the third largest investor, behind the US and Japan. Strong bilateral ties, including trade and investment, climate change agreements and mutual acceptance of international systems have supported the attractiveness of India to UK investors. UK investment accounted for 10% of projects (423) with more than 99,600 jobs created in India between 2007 and November 2011. UK investment mainly focused on ICT in business services, sales, marketing and support.

The latest survey also highlights that India’s relative attractiveness compared to both developed and emerging economies has improved throughout 2010. While 55% of the survey respondents found China to be India’s main competitor in terms of FDI attractiveness, this is down from the 60% response in the 2011 India Attractiveness Survey. Similarly, 8% saw the US to be India’s main competitor in the latest survey, which has reduced from 17% in the previous year.

The fundamentals that make India attractive to investors remain intact. The high potential of the domestic market driven by an emerging middle class and cost competitiveness continue to make India one of the most preferred destinations for our survey respondents. This year, respondents also identified India’s large talent pool as a strong competitive advantage, with more than 25% of the respondents identifying it as one of the key characteristics, which makes India attractive.

Almost a third of the respondents believed that India would have achieved double-digit growth rates by the end of this decade.

Rajiv Memani, Country Managing Partner of Ernst & Young India said, “India’s domestic demand-driven growth model is acting as a catalyst for attracting foreign investments into the country. Although the ongoing global uncertainty may have prompted global investors to become more cautious, India’s inherent advantages and proven resilience to counter-act macroeconomic challenges generally outweighs these concerns.”

Manufacturing – the next big leap

According to the survey, while India has been one of the leading destinations for shared services, the country is rapidly emerging as a manufacturing location for many foreign corporations. By 2020, 25% of our survey respondents see India among the world’s leading three destinations for manufacturing.

The recent FDI data mirrors the emergence of manufacturing for FDI. In 2011, 78% of investment in terms of value went to the manufacturing sector in comparison to 14% for shared services. This is despite the fact that in terms of number of projects, 54% of FDI projects were related to services and 34% were manufacturing-led.

Underscoring the potential in the domestic market, 35% of the companies surveyed nominated India as an attractive destination for domestic manufacturing and 21% as an attractive base for manufacturing for the global market. When investing in manufacturing projects in India, investors tend to target the industrial machinery, equipment and tools (115 projects) and the automotive (76 projects) sectors.

About 65% of the respondents believe that an improvement in quality of logistics and transportation will accelerate India’s attractiveness as a destination for manufacturing.
“India is transitioning into the next phase of the growth cycle, with manufacturing set to play a leading role in the growth trajectory. The sector is seeing renewed interest from policy-makers, which bodes well for the economy and investors,” says Farokh Balsara, Markets Leader, Ernst & Young India.

Scope for improving attractiveness

According to the survey, investors believe that in order to enhance its attractiveness, India needs to focus on improving its current state of infrastructure and governance. More than 75 % of the respondents surveyed mentioned that improving infrastructure is critical to enhancing attractiveness, while 60% emphasized the need for better governance and transparency.

Where has the FDI investment come from?

The United States remains the leading investor in India, both in terms of projects and jobs generated. There was a 30% increase in the number of FDI projects compared with 2010 and rise of 31% of investment projects (1,282), with more than 316,900 jobs created between 2007 and November 2011.

Japan and the UK, the second and third largest investors respectively, also saw an increase in FDI projects by 45% and 22% compared to last year, reflecting the slight improvement in the global economy since 2008 and 2009. The only investor country to have experienced a decline in the number of projects was the United Arab Emirates with a 27% drop. Yet it still remains among the top ten investors in India.

South Korea and China are the primary rapid-growth Asian economies that invest in India. These countries have recently lined up several big-ticket investments, particularly in the metals and mining space. Chinese investors have invested in 62 projects, creating more than 36,200 jobs since 2007, primarily in the manufacturing and technology sectors.

Between 2007 and 2011, an average 401 jobs were created per project by rapid-growth Asia-Pacific countries (excluding Japan), more than North American (245) and Western Europe (249). South Korea created on average 692 jobs per project while China created 584 jobs per project, far ahead of India’s current Western investors.