FDI Confidence in India Fell in 2015

The influential AT Kearney Foreign Direct Investment Confidence Index for 2015 somewhat unexpectedly reports a significant drop in India’s world ranking.  For the first time since 2002 India has dropped out of the top ten and finds itself ranked number eleven – below Brazil and Mexico.

After all the euphoria of Narendra Modi’s landslide victory and its accompanying positive rhetoric about what this would mean for India-bound FDI, this fall in the rankings may come to some as a bit of a surprise.  After all, you can’t fault Mr Modi for the gargantuan efforts he has made in terms of wooing the leaders of the world’s leading economies – he seems to have been on an endless round of relationship building visits over the past year during which he has extolled the changes which he is ushering in and which he promises will transform the economic, political and governance landscape of the world’s largest democracy.

Yet, despite all of this sterling work it looks as if the message has not yet been bought globally.  In fact the AT Kearney report indicates that confidence in India as an investment destination is waning.  Why is this?  To understand the situation more fully, we need to look at some of the structural problems that Mr Modi inherited and which he is currently valiantly striving to fix:

• Corruption – this remains a persistent worry for potential overseas investors who are worried by the uncertainty that perceived corruption issues present. Although it would be foolish to deny the fact that India does have a problem with endemic corruption at all levels of civil society and business, I would always question whether the situation in India is any worse than in China.  For some reason, corruption remains a bigger psychological issue for companies entering India than China – but I’ve never really understood why that might be the case.
• Bureaucracy – India is currently placed 130 out of 189 countries in terms of the ease of doing business according to the World Bank index.  Mr Modi is attempting ease the barriers to setting up a business in India through a big push towards digital (it is also hoped this will address some of the corruption issues).  Initiatives such as online VAT registration will undoubtedly help to reduce the burden of bureaucracy in India – but it is an ongoing process which needs time to take effect.
• Legal closed shop – Western businesses are worried that the Indian legal system is weighted against them and the fact that their trusted legal advisors are not allowed to practice in India exacerbates these fears.  Why, they ask, are highly reputable global law firms excluded from India? Something just doesn’t feel right about it.  Mr Modi needs to address this closed shop and he needs to address it quickly.  He has already hinted at a willingness to tackle the issue – let’s hope he does.
• Infrastructure – India’s infrastructure lags woefully behind that of the other big Asian heavy-weight China.  Hardly surprising given the fact that India started its economic liberalisation more than a decade later than China.  India is addressing this issue but it is a huge country facing huge infrastructure challenges. The willingness to address these issues is there at the most senior level but getting pan-India projects running is notoriously difficult.  India is a states-based democracy and not a totalitarian regime. As much asMr Modi might want to bang heads together up and down the country, it simply isn’t that simple.  He faces a monumental task getting everybody to march in the same direction – even with his landslide mandate.

Much to Mr Modi’s credit, he is addressing each of these issues and is making significant progress in most of them.  His express aim is to quickly and radically improve India’s position in the ‘Ease of Doing Business’ index and I am confident that, given time, he will succeed.  But (and this is a big but) it will take time.  India moves slowly and change will not be instant.  The question is whether he will be afforded the time he needs.

On the ground, speaking to western businesses about India as I do on a daily basis, India is still seen as ‘difficult’.  I argue with people that India is no more difficult than China, Brazil or Indonesia but market sentiment moves slowly and we are then into a chicken and egg situation.  Will more and more western companies take the ‘risk’ of going into India before the necessary changes take effect or will the structural changes need to be in place in India before people have the confidence to invest?

My advice is always the same – and unmoved by the AT Kearney report. 

India is the future.  The demographics, entrepreneurial flair and energy of the people of India have convinced me that India has a very bright future.  I wrote an article last year in which I outlined ‘5 Reasons to Invest in India Now’.  Those positive and powerful reasons for investing in India have not changed at all – in fact they are more powerful than ever.

Forget the AT Kearney report.  Get on a plane, go to India and see for yourselves.