Investors bearish on India's growth prospects

If Indian money looks around at the economic climate and decides instead to go to Latin America, West Asia, or China, then why would foreign money’s decision be any different?

Earlier this week, this newspaper reported a statement from the managing director of Apollo Tyres, Neeraj Kanwar, that was both revealing and worrying. 

Speaking of his tyre company’s capital-expenditure plans, he said: “There is a very clear growth-capex programme that has been identified. Plants with the opportunity to grow will be the first ones (to get investments). So, you would have Serbia, China and, later, Mexico. India right now does not need any growth capex... We will just be doing maintenance capex here.” 

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In other words, even for Indian companies, India is no longer a growth market. If this is the perception that is spreading across India Inc, what chance of an investment-led growth revival?

This reveals how mistaken is the government’s attempt to fix the gaping current-account deficit and revive growth and investment by searching only for foreign funds. 

Foreign investors seek out growth and returns; but so do domestic investors. 

If Indian money looks around at the economic climate and decides instead to go to Latin America, West Asia, or China, then why would foreign money’s decision be any different?

Indeed, if Indian entrepreneurs can’t put their money to work here, why will foreign companies imagine they can?

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True, foreign investors have been shying away from India for several months, but domestic investors too have been bearish on the Indian economy’s growth prospects for some time.

Many of them are looking at foreign countries as a destination for fresh investment and the government should take note of it.

The numbers themselves are disturbing. While the reasons why 2012-13 was considered a worse year for investment by India Inc than the one before are well understood, it is worth noting that outward equity investment from India in fact increased. 

The overall outward foreign direct investment number fell – but the crucial component, excluding repatriated earnings and so on, is the new equity investment from India to the world. 

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And that actually increased from $6,642 million in 2011-12 to $7200 million in $2012-13. Meanwhile, inward investments slumped from about $35 billion to about $22 billion.

True, inward investment continues to dwarf outside investment. But the nature of the trend is nevertheless clear. Indians are investing abroad rather than here; and foreigners are catching on as to why.

It is thus clear that the government must give up on its attempt to ensnare foreign investors by pie-in-the-sky promises and tweaking of various complicated foreign-direct-investment rules. 

The only way to ensure foreign money helps India invest and grow is to ensure that all money is welcome. 

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When domestic investors start turning positive on the India story, then foreign money will flow back in. What the government has to do is to make India a better place to do business.

Rather than focusing just on the big infrastructure projects - although those are a quest it must not abandon - it should also ensure that governance and regulatory reform reduces the amount of red tape, at least at the Central level, for all forms of investment.

States should be incentivised to do the same. This is not the same as one-stop windows for some big-ticket projects, but an all-round attempt to make business easier.

Even if an attempt is seen to be made in good faith to begin addressing this problem, then the trend of money looking for returns elsewhere may well come to a stop - and that is precisely what India most needs.