FDI (Foreign Direct Investment) is a topic thatâ€™s been discussed to no end lately. British retailer Tesco and telecom major Vodafone are just two major firms whose investment in India has been approved by the government. Sources indicate that companies like Idea and HDFC Bank seeking shareholder approval to increase the foreign institutional investment or FII limit in their companies. Whatever the political sentiment may be with regards to FDI and FII, the economic reality of the present is that India needs more such investments.
Here are few key takeaways from these developments:
An Upward Trajectory for the Market:
The markets receive a huge boost when foreign investors pump in money. It indicates that there are signs of growth. In anticipation of this future growth, they move to increase their shareholding. Vodafone is one of the top telecom players in India. With data and voice consumption on the rise and falling costs, the sector holds great potential. Tescoâ€™s entry shows that there is a great amount of optimism in Indiaâ€™s growing retail industry. Unilever has also upped the ante when it comes to investing in its Indian unit â€“ Hindustan Unilever. The most critical aspect about these investments is that theyâ€™re expected to boost confidence in the economy and give a green signal to other investors.
The Economy Receives Big Boost:
The direction of a countryâ€™s economy depends significantly on the investments being made. Operational or strategic expansion cannot take place without capital injection. According to government data, investments, when measured as a ratio of the overall economyâ€™s size, fell from a peak of 38% in 2007-08 to 35% in 2011-12. Hence, economic growth has slumped from 9% to sub-5%. The current projection is for the economy to grow by 4-5% in the current financial year. But, with an increase in investments and exports, this could rise.
Investments in the market and job creation are directly related. According to some estimates, the job market has shrunk. Firstpost, an online news website reports that 380,00,00,000 jobs in the non-agriculture sector would be created by 2019. Still, this is less than the 520,00,00,000 jobs created between 200405 and 2011-12. As the investments will increase, so will the rate at which new jobs are created.
This year has seen less investment than the last. But, investment in the quarter ending in December is 4.9& of the GDP; up from 3.6% of the GDP in September. This though is primarily because of government spending. Investment in the private sector is down to 0.6% of the GDP in the December quarter from 1.3% in the previous quarter.
Indiaâ€™s economy has taken a hit since the 2008 financial crisis. Industrial activity has slowed, inflation has risen and interest costs have gone north. However, the worst seems to be over. Valuations are relatively lower as there is still no certainty on the timing of the recovery and that makes the current levels ideal to invest for the long term.
A key reason for the fall in investments was the lack of or delay in clearances from the government. As a result, projects were either stalled or cancelled altogether. Nearly $38 billion-worth projects were stalled in three years by the end of December 2013, according to a report in the Business Standard. However, the government has cleared projects worth Rs 1-1.5 lakh crore ($16-24 billion), especially in the infrastructure sector.
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