India remains top investment market despite challenges

Multinational companies doing business in India face numerous challenges, including a domestic economy that grew less than 4% last year compared with 10.5% in 2010. But the world’s second most populous country still ranks among the top five destinations worldwide for foreign direct investment, according to an EY report.

Executives of about 500 companies polled by EY said India needs to reduce corruption and strengthen the rule of law, simplify its taxation system and develop its transportation infrastructure. But competitive labour costs, burgeoning domestic consumer demand and an educated and skilled workforce helped India attract more than 1,000 foreign direct investment projects worth more than $42 billion in the past 24 months, fDi Markets figures suggest.

That means India ranked fifth among the countries most attractive to direct foreign investment in 2012 and 2013.

“India continues to draw a healthy share of the capital allocated to emerging markets,” Jay Nibbe, chair of EY’s Global Accounts Committee, and Rajiv Memani, chair of EY’s Emerging Markets Committee, wrote in the report.

“Among respondents that had an emerging market strategy, nearly a fifth said that India accounts for more than 20% of their total capital allocated for the developing world,” they added.

Slowing economic growth has cost emerging economies worldwide investments from multinationals, the 2013 fDi Report suggested. From 2011 to 2012, the number of foreign direct investment projects declined in China (27%), India (20%), Brazil (14%), Peru (35%), South Africa (5%) and the United Arab Emirates (12%). But developed economies also attracted fewer projects in 2012 than the year before – North America was down 9.5%, Germany was down 47%, and the UK was down 8%.

Economies that received more foreign direct investment projects in 2012 than the previous year included Australia (4%), Indonesia (8%), Spain (9%), Chile (25%) and Nigeria (20%).

Increasing interest from investors in the Middle East and Southeast Asia and India’s growing middle class and skilled workforce helped India retain its attractiveness, according to the EY report. Respondents to EY’s 2014 survey expected India to be among the top three growth economies in the world by 2020.

To realise its potential, respondents suggested India enhance its business environment, develop its infrastructure, boost production, improve its taxation system, ease regulations for foreign direct investment and increase awareness about its emerging cities.

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—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.