India has displaced the United States as the second-most favoured destination for foreign direct investment in the world after China in the AT Kearney FDI Confidence Index.

The US has slipped to the third place, which was occupied by India last year.

AT Kearney's confidence index is an annual survey of executives of the world's largest companies.

"India is on the cusp of an FDI take-off. However, for India to harness manufacturing investor interest and evolve into an FDI capital-intensive hub, the government must maintain its reform orientation and overcome narrow business interests," said Paul Laudicina, managing director of AT Kearney's Global Business Policy Council.

Last year, FDI in India reached $5.3 billion, compared with China's $60.6 billion.

The optimism about India can be attributed to factors like financial services investors upgrading the country from the fourth to the second-most attractive FDI location, relaxation of ownership restrictions in telecom and positive developments in heavy and light manufacturing industries as well as in the wholesale and retail sectors despite uncertainty about liberalisation.

The US lost ground mainly in the light manufacturing and financial services sector.

India is expected to get the lion's share (42 per cent) of selected offshore functions going overseas over the next three years, compared with 17 per cent for China. Other likely destinations for offshore investments are eastern Europe (11 per cent), the US (5 per cent), and the United Kingdom and Singapore (3 per cent each).

Globally, offshoring is on an upsurge as nearly 80 per cent of global investors say they plan to locate corporate functions overseas in the next three years, compared with 66 per cent in 2004 and 50 per cent in 2003.

This year, 54 per cent of executives have said they are planning foreign investment increases, the largest number since 2000. Global FDI inflows rose by 2 per cent to $648 billion in 2004, the first positive change in FDI since 2000.

India and China are also at the top with the highest levels of investor optimism. Forty-five per cent investors have said they are more upbeat on China and India, compared with last year, which is nearly twice the number recorded for the next three-most positively viewed markets -- Brazil, Poland and Russia.