INDIA BUSINESS WORLD - MAY 2006
THE MONTH THAT WAS...

ELECTRICAL GOODS MAKERS CORNER 24% OF TOTAL FDI INFLOW IN 2005

  IF improved macro fundamentals have encouraged India Inc to invest in new projects, as has been reflected in the sharp rise in the number of industrial entrepreneur memoranda (IEM) filed in the last two years (ET April 24), it has likewise prompted foreign investors to raise their stake in Indian industries.

Aggregate inflow of foreign direct investment (FDI) has increased by more than 66%, from Rs 11,617 crore in 2003 to Rs 19,299 crore in 2005. FDI inflow had declined by 36.2% in 2003 following deceleration in growth rate of industrial production. Industrial production has grown rapidly since then and has helped reversing the trend — industrial production grew by 8.4% in 2004-05 and by 8% during the first 11 months of 2005-06 over the corresponding period of previous year.

While higher industrial production has strengthened the confidence of foreign investors in Indian industries, opening up of new areas and changes in government policy towards FDI must have engineered this jump in foreign capital inflow. In fact, about a fourth of the total FDI that came to India since 1991, came during last two years. In actual terms, a huge Rs 36,565-crore foreign capital has flowed in during last two years.

Opening up of new areas may have given foreign investors more investment options, but they still seem to be concentrating on a few pockets. In 2005 for example, of the total FDI inflow, nearly one-fourth (24%) has gone to just one industry, namely, electrical equipment. In actual terms, the FDI inflow to this industry has increased by 16% in 2005, over and above 192.7% rise in 2004.

The electrical equipment industry has been the most sought-after destination for foreign capital since the economy opened up and has accounted for about 14% of the total FDI inflow since 1991.

The electrical equipment industry, which includes consumer goods, has been one of the fastest-growing industries in recent years and it was no wonder that it attracted a larger share of FDI inflows. Production of consumer goods has been rising steadily since 2000-01 — it rose by 11.7% during the first 11 months of 2005-06, over 2004-05. It grew by 11.5% in 2004-05 over the previous year.

The second most important destination of FDI in 2005 was the service sector, that comprises banking, insurance, trade, hotels and real estate. The service sector has been the prime mover of India's gross domestic product in recent years and foreign investors never had any doubt about its potential. However, policy restrictions did not allow them to invest in this industry as much as they willed. Now that restrictions have eased out, FDI has flowed in to this industry as never before. It accounted for a huge 16.3% of the total FDI inflow in 2005. In actual terms, the FDI inflow to this sector grew by a phenomenal 175% last year over 2004.

Likewise, the cement industry, whose growth potential has multiplied manifold following the construction boom, too has attracted substantial FDI in 2005. It's share in total FDI inflow, that hovered around 2-3% at the beginning of the present decade jumped to 10.1% last year. The actual inflow has increased from an insignificant Rs 0.73 crore in 2004 to Rs 1,970 crore last year.