India’s growth push gets regional boost

Asian countries are among the biggest investors in India as the region increasingly backs its own rapid growth amid a fall-off in longer-term capital from the west.

India, the world’s fastest-growing large economy after China, has witnessed a surge in foreign direct investment from countries such as China, Japan and Malaysia. Investments from the US, France and the UK have declined over the past year.

Higher levels of FDI are crucial for India to achieve its ambition of double-digit growth. Duvvuri Subbarao, India’s central bank governor, has warned that India needs a quantum step” in investment if it is to propel its growth rate higher than the current 8.5 per cent.

An Ernst & Young study, released on Monday, showed that in spite of an often strained relationship across the Himalayas, FDI from China almost doubled over the past year. China was India’s ninth largest investor by number of projects in 2010, up from 16th the year before.

“In terms of potential new long-term trends, perhaps the most significant is the rapid growth of China as an investor in India,” the report said.

Japan has invested more in India than in China over the past two years and has overtaken the UK and Germany as investors, as capital has flowed into India’s manufacturing sector.

Although the US is still India’s largest investor, its share of investment has fallen from 45 per cent of total inflows into India in 2003 to 30 per cent. The number of investments last year was half the tally of four years ago.

Investments in India’s $60bn information technology sector have become increasingly controversial, triggering public anger and strong protectionist rhetoric at a time of high unemployment in the US.

Asian investors show a clear preference for the automotive, electronics and infrastructure sectors. But some are wary of India’s longer-term constraints.

“India is not a large energy-producing country and in view of its anticipated growth I expect the demand for energy to outstrip supply in times to come,” said Daisuke Ochiai, chief financial officer of Mitsui & Co. “I feel this could be a risk factor in India’s growth story.”

China remains the big FDI destination of the region, attracting about two-thirds more than India in spite of projections that India’s growth rate may overtake that of China’s in the coming five years.