Place in India has captured the imagination of the world, while the economy grows at nearly 9 percent a year and a growing class of consumers buy cell phones, cars and houses. No wonder that foreign companies are increasingly eager to capitalize on that growth by investing here.
Or are they? Despite India's impressive growth, companies and foreign investors have begun to look elsewhere. Foreign direct investment in India fell by over 31 percent, to $ 24 billion in 2010, even as investors flocked to the developing nations as a group.
And in the past two months, foreign investors took $ 1,400,000,000 india stock market, helping drive the country nifty 50 stock index by 17 percent from highs set in early November.
The decline in foreign investment include outsiders still face challenges in India, two decades after politicians began to open the country to the world. For indigenous leaders, the decline in foreign money may make it harder to achieve faster growth and economic context that they need to create jobs and lift hundreds of millions of 1100 million people in India out of poverty.
While the inefficiency and bureaucracy are not new in India, analysts and executives say that foreign investors have lately been startled by a government corruption scandal much publicity about the licensing of wireless communications. Another reason for hesitation is a corporate tax battle between officials of India and the British company Vodafone now before the Supreme Court.
Meanwhile, the inflation rate - 8.2 percent and rising - seems beyond the control of India's central bank, and has done nothing to reassure foreign investors.
Jahangir Aziz, an economist at JPMorgan in Mumbai, said that while politicians in India have been apparent ambivalence towards foreigners, other emerging economies have drawn the red carpet. Recently, foreign direct investment to countries like Thailand, Indonesia and Brazil has soared. Direct investment in Brazil, for example, rose 16 percent, to $ 30.2 million last year, according to the UN.
Still hope
There is no doubt that investors and companies around the world are betting on growth in India. Last year foreign investors poured about $ 30 billion in the Indian stock market - and thus, some profit taking of all time on the market last fall was high, probably expected. And last week BP announced it would buy in oil and gas here for $ 7.2 billion, which would be the largest foreign investment yet in India.
But the broader trend signals that foreign companies and investors are worried about their ability to do business in India.
Aziz and other analysts say the slowdown in foreign currency is part of a wider withdrawal which also includes Indian companies. Private investment as a percentage of gross domestic product of India was reduced to about 22 percent in the fiscal year from 25.6 percent a year earlier. Analysts say companies are more cautious due to problems in obtaining regulatory approvals and uncertainty about the direction of government policy.
So far, the deficit has been developed by higher government spending and personal consumption. But economists note that these, alone, are not ingredients for sustained growth.
And despite Prime Minister Manmohan Singh, promises, executives fear they will not be able to convince other politicians to make the necessary changes. Ministers of India often circumvent the broader set of Singh, who designed the first major economic reform in India in 1991, when he was finance minister.
She now heads a fractious political coalition. And recent corruption scandals, including allegations that bribes helped undermine poorly organized last year's Commonwealth Games in New Delhi, have further eroded the credibility of the government.
In private, business executives complain that Indian officials are experts to proclaim their commitment to free markets, but it takes concrete steps to ease restrictions. Doing so is politically difficult in India because many politicians, trade unions and civil society groups prefer government spending and domestic protectionism on economic liberalization.
In the retail sector, for example, the country still bars foreigners to own stores that sell more than one brand of products. This restriction, intended to protect many small retailers in India, preventing Wal-Mart, Tesco and other sales to class in India growing consumer. In recent months, officials of India has sent mixed signals about whether the government intends to facilitate the policy.
In insurance, MetLife, which has invested $ 139 million in a company in India, I would put more money into the country. However, it is restricted by rules that limit foreign ownership in insurance companies to 26 percent - a limit that policy makers established in 1999 with the expectation that they would raise in a few years.
MetLife, which has already reached that limit, can not grow as fast in India, as it can in Brazil, where it owns 100 percent of their members. Even in China, known to favor their domestic companies, MetLife owns 50 percent of its insurance business there.
Concern over tax laws
Foreigners are also increasingly concerned about the tax laws of India. Vodafone, the global telecommunications giant, is struggling with tax officials who want to pay about $ 2.5 billion in capital gains tax on its 11 billion U.S. dollars acquisition of Indian mobile phone company in 2007. The Indian authorities say that Vodafone should have deducted the tax money you paid to Hutchison Whampoa, a Hong Kong company.
Vodafone says that no tax should apply because the transaction took place outside India and that applying the tax to be paid by Hutchison. Analysts say Indian officials are billing Vodafone Hutchison, because it no longer does business in India.
The tax case of Vodafone and other companies with concern that taxes are subject to unexpected when it comes to buying and selling their investments, "said Nandan Nelivigi, a partner at law firm White & Case in New York that advises companies on investing in India.
"Foreigners do not want to avoid paying taxes in India," he said. "But I just want to know what their tax obligations are."
However, some executives say that doubts about the investment climate in India are being exaggerated.
Gunit Chadha, chief of operations in India from Deutsche Bank, said that while he would like politicians to accelerate the pace of reforms, he does not believe that India has become hostile to foreign companies. Despite the recent recession, he said, cash flow remains much higher than as recently as 2004, when India attracted only $ 6 billion in foreign direct investment.
"Sometimes it's a good idea to open the faucet is calibrated so as not to flood the place and then having to turn off the tap erratically or clean up the mess," said Chadha. "You always have a situation in which one could argue that could have done a little more or a little faster, as is the feeling. But in a democracy like India, more slowly is beneficial."
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