India heading for record FDI inflow, says DIPP Secy

The EY survey ranks India as the 'most attractive market' -- Economic fundamentals stand strong, and global interest is on a steady upswing. The election of a pro-reform Government and its various initiatives - Make in India, Digital India and 100 Smart Cities - have added to increased optimism, says the report. The survey says India has emerged as the number one FDI destination in the world during the first half of 2015. With FDI capital inflows of US$30.8b, India has outpaced all other economies, moving up to the premier position from being in the fifth spot during the corresponding period of the previous year.Read More: Details of the surveyAffirming this positive news, Amitabh Kant, Secretary, DIPP in an exclusive interview to CNBC-TV18 while discussing the survey said India was headed for a record FDI inflow, which is a consequence of macro-economic stability, fiscal consolidation, political stability, low inflation, interest rate cuts – so, the government has given huge impetus to all the correct things.When asked if India would be able to attract big ticket FDI Investments into manufacturing, he said: “FDI has seen resurgence as far as manufacturing is concerned, which is a positive for the government because manufacturing creates jobs.”He is confident that India will be on the top as the survey claims. All that India needs is to sustain that position and provide momentum. Kant is also confident of fresh money coming into sectors like insurance and defence, adding that defence manufacturing will be a key driver for India’s growth but more orders need to flow in from the ministry. Defence is bound to see a lot of investment come in.Insurance too in the next 3-4 months will see huge inflows, said Kant.Meanwhile, Rajiv Memani, CEO, EY India also thinks there is need for large defence contracts and more clarity is required on offset policy, procurement policy etc. People, he said are ready with investment plans but waiting for orders, he added.Below is the verbatim transcript of Amitabh Kant and Rajiv Memani’s interview with Shereen Bhan on CNBC-TV18.Q: While we have seen positive moves as far as foreign direct investment (FDI) is concerned, in fact a 48 percent up surge in FDI, this year in dollar terms at about USD 30.8 billion in the first half of CY15. Given the global economic scenario, the global slowdown that we are currently witnessing and also some setbacks on the reform front in India, do you believe this number is sustainable or can in fact be improved upon?Kant: This number is going to continue unabated. My view is that India is heading for a record FDI inflow this year and this is largely a consequence of macro-economic stability, there is fiscal consolidation in the Indian economy, there is political stability, inflation is at an all-time low. We have had a reduction of 125 basis points during the last 12 months on the interest rates and there is a huge push for all the stalled projects. So, I think the direction is absolutely perfect. The government has given a huge impetus to all the correct things.Q: While the mood as far as India is concerned is clearly much more optimistic than it was in 2014 for a lot of the reasons that Amitabh Kant has already articulated but let us talk about the road ahead and I was alluding to the global factors but let us also talk about the domestic factors. This survey that you conducted was done in the early part of 2015. Since then we have seen a fairly stormy parliament session, since then we have seen setbacks on things like goods and service tax (GST), etc which by the way in your survey is highlighted as one of the key reforms that foreign investors are looking forward to. Do you believe that the mood perhaps maybe dampened a tad at this point in time on account of some of the setbacks that we have seen in the local economy? Memani: I continue to believe that there is a general level of optimism that still prevails, in fact, I would say that it has been only increased. On the regulatory reform side, also on the tax side whilst there are still lot of lingering issues but at least the efforts of the government once this minimum alternate tax (MAT) thing as sorted out, the Vodafone issue. So I would think that overall the mood is still buoyant. I think the key thing from a government standpoint I would say which will change the tide even further would be if the demand in India starts growing further and if some of the large contracts are issued, some large projects get on-stream whether it is in defence, in railways or it is in infrastructure. I think people are ready to come in. I think they are very enthused by the reception that they are getting from the current government. They are very enthused by what they are hearing, what they are seeing, also some of the things that are happening on the ground. Q: When you look at the global picture, growth in FDI has actually gone down or declined 3 percent when we look at the global picture. Even as far as the Asia-Pacific region is concerned India has clearly outpaced the growth of FDI in the Asia-Pacific region as well. However, let me talk specifically about FDI into manufacturing and this perhaps is the heartening story at this point in time because FDI in manufacturing, as per this report, has grown at the fastest pace that we have seen in the last seven years. We have been talking and you and I have discussed this, the likes of Foxconn and so on and so forth setting up assembly facilities in India. How confident do you feel about continuing to attract big ticket dollars when it comes to manufacturing?Kant: There are two very unique findings about this report. One is the fact that FDI has seen a huge resurgence as far as manufacturing is concerned. My view is that this is a huge plus for this government because manufacturing is an area which is going to create jobs. Therefore, we have seen in recent times all the mobile manufacturers actually manufacturing in India for the domestic market, we have seen Siemens, we have seen Daimler, we have seen General Electric (GE), we have seen just about every top company of the world coming in to manufacture here. My belief is that India will become a very attractive destination for marketing for various reasons, one of which is that in terms of sheer cost differential, India will be far better placed than China simply because the wage rates in China have increased enormously over the last three years.The second unique finding of this study is the fact that by 2020, India will be one of the top three economies, India will be a regional and a global hub for manufacturing and India will be one of the top three manufacturing nations of the world. Those three findings are very remarkable as far as this particular study is concerned. _PAGEBREAK_ Q: Speaking of this ease of doing business, if I were to ask you, and there have been several bold measures that have been taken or at least measures that were anticipated would have been taken by the previous government that have been pushed through by this government when it comes to opening up FDI across sectors. Defence is now gone up to 49 percent, we have seen liberalisation as far as the insurance sector is concerned. Let me ask you about those two sectors in specific since we are talking about Make in India and we are talking about the growth of the financial services sector. Despite the fact that several partners existing joint venture partners have already applied for Foreign Investment Promotion Board (FIPB) approval and so on and so forth, almost 10 or 11 months down the line, we actually have not seen any money come in for the insurance sector. Similar story seems to be playing out even as far as the defence sector is concerned. Why do you think that is the case?

Memani: I would say in the defence sector, the key thing would be the defence contracts, the large defence contracts still have to be issued. There is some more clarification on policy that is required. So, people are ready, a lot of companies are investing a lot of time and money to understand what is happening. They are ready with their plans. By the time they roll out, it will take, the contracts will have to be issued. That unfortunately have not yet been issued. And some more clarity on the procurement policy, some more clarity on the off-set policy, those things will be required. So, once that is done, it will take, because defence are large contracts without the contracts, people are hesitant to put in the manufacturing capacity. On insurance side, valuations, Insurance Regulatory & Development Authority (IRDA) clearances, FIPB approvals, understanding between partners, plus some issues around management control, what does management control mean and everything else.

Those issues are, somewhere the percentages have been changed, there is some peculiarities that have come in terms of management control. That has been a bit of a dampener. But I would say at least four or five of these applications are now moving ahead. And I am hopeful that in the next three to four months, you will see some amount of foreign capital come in. Also, may look at some companies listing in 12-18 months time.

Q: Let me put the same question to you. Do you accept that while there was liberalisation in sectors like insurance, we did not really keep pace with what needed to be done on the regulatory front, it got caught up in all of these issues of ownership and control? Do you feel confident that we are likely to see fresh money coming in into the insurance sector and also, when it comes to defence the off-set policy, the new procurement policy has been in the making. We were expecting it a while back. We still have no clarity on whether we will get those new policies by the end of this year or not. Do you feel that somewhere we are perhaps squandering an opportunity?

Kant: My belief is that defence manufacturing will be one of the key drivers on India’s growth. There is a huge possibility. I think a lot more orders need to flow from the defence ministry. The defence off-set policy is at a very advanced stage. A number of decisions have been taken for future as far as off-set policy is concerned. They need to set right a couple of things with retrospective effect. The defence procurement policy is also at its final stages. And in the next two to three months, you will see a huge movement altogether on the defence side and my personal belief is that defence will just get cracked in one shot and you will see a lot of investment coming in. In fact that will be the biggest driver of India’s manufacturing in the years to come.