India: Stacking up the case for investment

That’s the expectation Indians have of the Gulf. And much of it is already realised. Reportedly, an internal and yet unconfirmed government estimate has recently suggested that the UAE has invested around $4.5 billion (Dh16.5 billion) in India in the past few months. However, it wasn’t clear how much of it came through the foreign institutional investor (FII) route and how much through foreign direct investment (FDI). But that’s one lack of clarity everyone’s living with, at least till now.

What is clear though is that India is a hot destination for investments from the Gulf region.

In the eastern part of Delhi, as you enter the upcoming Commonwealth Games village, the huge Emaar-MGF banners fly high as symbol and testimony to the new phenomenon, the growing Indo-Arab trade. The joint venture company is building the Games Village. The flats in the project will be bought by Delhi Development Authority (DDA) for Rs7 billion ($153 million, Dh551.8 million). The Emaar-MGF JV put $1 billion foreign investment in the Indian realty market.

And there’s so much more that Gulf money is helping India to build. According to a KPMG report in April 2008, the major sectors that attracted Arab interest included infrastructure (an accumulated $112 billion), special economic zones (SEZs) ($12 billion), agro- and food processing ($900 million), real estate ($700 million) and oil and gas ($500 million).

Several companies from the Arab world are now active in India.

According to a recent survey by the Federation of Indian Chambers of Commerce and Industry of India (FICCI), a leading trade body, total trade between India and the Arab countries (including the Gulf) stood at around $102 billion in 2007-08. In the next ten years it is expected to increase by around five times this figure.

There is a clear upward trend in trade between the countries in the region and India. In 2007-08 India’s trade with Bahrain grew by 65 per cent, with Egypt by 35 per cent, with Syria by 42 per cent and with Kuwait by 27 per cent.

Almost as a corollary, the trend shows in the investment figures too. As the FICCI survey mentions, there have been significant inflows of investments into India, particularly from the UAE, $285 million in 2008 alone.

Between April 2000 and February 2009, FDI inflows from Arab countries were as follows: UAE $911 million, Oman $61 million, Bahrain $25 million, Saudi Arabia $16 million, Morocco $15 million, Kuwait $7 million, Tunisia $4 million and around $1 million each from Yemen, Jordan, Lebanon, Qatar, Egypt, Libya and Sudan.

Now, that’s as much clarity as we can get. Yet, a lot more may have been invested through the FII route.

Meanwhile, Gulf companies have started looking at India as a sourcing ground of scientific, technological and management talent.

It is well known now that India wants to bridge much of the infrastructure gap with money from the Gulf, as the country needs around $500 billion for this purpose over the next few years.

As Minister of State for External Affairs Shashi Tharoor says, “In many areas, countries of the Arab world have the capital while India offers the opportunities.”

After the West’s recession, that expectation carries even greater validity. Supposedly, there has been growing shakiness among Arab investors about investing much further in the West.

In fact, the apparent faux pas of investing in the West, with hindsight, set in much earlier in the decade, since 9/11. Around that time Indo-Arab trade stood at a mere $7 billion. Now the Arab world accounts for 21 per cent of India’s total trade, at $87 billion. Much of it may be attributed to India’s dependence on energy imports.

But what is significant is that non-oil trade has also gone up. For instance, India has been the number one destination of the UAE’s non-oil exports in the recent past.

Clear gains

A recent survey by KPMG among companies in the Gulf shows India as a clear gainer of Gulf investments in the next five years. Thirty-four per cent of those respondents look at India as the hottest investment destination. Even Kuwaiti investors, geographically slightly further removed, have named India as the country of their choice.

As Dr Amit Mitra, FICCI Secretary General, says, much of this has been the result of the Arab-centric initiatives of the Indian business community itself.

The interest, however, has not been limited to the business community. Governments have taken strong interest in the process. For example, the Indian government has entered into an understanding with Saudi Arabia and Oman to set up investment funds of $500 million and $100 million respectively.

But not everyone is yet satisfied. Sunanda Rajendran, Executive Director of the Mumbai-based Indo-Arab Chamber of Commerce and Industry, points out that Gulf investment in India has been much below expectation thus far.

“We still have many opportunities to attract investments from the Gulf region: in IT, railways, infrastructure, MSME (micro, small and medium-sized enterprises), power, energy, pharma, engineering, constructions, real estate, etc..” The list is obviously extensive.

Dr Abdul Khalique, Head, International Division of the Associated Chambers of Commerce and Industry in India (ASSOCHAM), agrees. “It is still hard for India to shed its traditional dependence on the West. We need to be more pro-active in attracting investments from the Gulf. We also need to look beyond infrastructure.”

An Indian IDSA (Institute of Defence Studies and Analyses) study states that “Indian businesses should also point to GCC investors the peril of over-relying on a few sectors.” During the recent oil boom the GCC sovereign wealth funds (SWFs) predominantly invested in financial (25 per cent) and real estate (24 per cent). Thus, when the sub-prime credit crisis hit, losses were unhedged. Other sectors may be good not only from the point of ‘better’ returns, but they are also safe and offer long-term prospects.

The other major concern is that more direct investment still goes from India to the Arab world than vice versa. While Indian investment in the Gulf has multiplied, only in Saudi Arabia, according to Sunanda Rajendran, has Indian investment doubled in the past five years.

FICCI research shows that the Arab region attracted 5 per cent of Indian cumulative FDI since 2000, mostly in the energy sector, followed by services. Its survey says there have been 157 joint ventures in Saudi Arabia alone.

That volume may be missing in India, but then nobody is absolutely sure how much Gulf money is actually invested there.

There have been several reports suggesting that the Indian agencies have been seriously concerned about money in portfolios, especially through Participatory Notes. It has forced the government to consider clubbing FII and FDI in the data. More recently, the government has decided to tighten even the FDI route, especially in certain sectors, that may eventually include refineries, civil aviation, power and real estate. Many analysts feel that these steps may be counter-productive.

The other bone of contention is the proposed free-trade agreement FTA between India and the GCC nations. Reportedly, even in the policymaking bodies there are differences on the issue, as duty in the Gulf countries is already low, and Indian exports would hardly make any extra gains from such an arrangement. But many want to look at it as a point for attracting investments into India.

One point where there is no dispute is as to the value of money from the Gulf as a key contributor in India’s development.

The writer is a freelance journalist based in India.