New globalisation paradigm in the offing
Outbound FDI from India will increasingly be driven by a need to fill knowledge and product gaps aimed at the domestic market.
Finance Minister Arun Jaitley has greased the wheels of the investment cycle with allocations of almost $90 billion for building roads, railway infrastructure, inland waterways, ports, airports and rural infrastructure for 2017-18. This massive public spending spree, marking a humungous increase over the figures for the current year, is expected to translate into large contracts for Indian and foreign companies.
Though private investment remains sluggish in India – and this is expected to continue for a few more quarters – the government’s infrastructure building programme will throw up a need for more raw materials, technologies, capital goods and the like.
And this is likely to influence, to a large extent, Indian businesses appetite for foreign investments and acquisitions, which is likely to become more strategic than before.
Latest IMF data reveals that India is the world’s sixth largest source of outbound foreign direct investment (FDI) dollars in the world. The UK and the US are already becoming familiar with big and medium Indian businesses, many of which are household names in India but not very well known abroad.
The Tata Group, for example, is fairly well known in the UK – as the owner of Jaguar Land Rover, the erstwhile Corus steel works and Tetley Tea… and as Great Britain’s largest manufacturing employer.
India is already the third largest foreign investor in the UK, but as opportunities expand in its domestic market, more and more companies will step out and embark on foreign acquisitions to fill in critical gaps in their knowledge and/or product portfolios to enable them to take advantage of those opportunities.
There are signs that this might already be happening – even before the presentation of the Budget. After peaking at $18.84 billion in FY08 and $19.37 billion in FY09, outbound FDI from India maintained its momentum for the following three years before beginning to taper off. As the Indian economy began to slow down in the sunset years of the UPA-II regime, Indian appetite for foreign acquisitions also reduced in tandem.
But the current calendar year began with a bang after three successive slow years. In a sign that the rising tide in the Indian economy was lifting the confidence of Indian businessmen, Motherson Sumi paid more than $600 million to buy Finland’s PKC Group and Zydus Cadila pulled off a $170-million acquisition of US-based Sentynl Therapeutics.
Along with a few other small acquisitions, the outbound FDI figure for January 2017 stood at a very respectable $1 billion. Not bad, considering that Indian companies spent only $5.3 billion, $5 billion and $1.7 billion in each of the last three years on foreign acquisitions.
Now, as the process of building India’s smart cities begin, as more rivers are made navigable and converted into inland waterways and as the railways embark on more complex modernisation programmes, Indian companies, eager to protect their turf from foreign competition, will again be forced to spread their wings abroad to buy up companies with the technical knowhow and experience to undertake the many new projects that will come up for bidding.
This will lead to a crucial change in strategy. In the early years of globalisation, many Indian companies succeeded in becoming part of the global supply chain – but their role was primarily that of suppliers of raw materials and intermediate goods for products made in other countries for the global market.
The change this time will be that Indian companies will be on the lookout for foreign suppliers of raw materials and manufacturers of intermediate goods for end products to be made in India for the Indian market.
And as the domestic market picks up and corporate health improves across the board, many other companies will resume their quest for a global footprint – and this is expected to fuel outbound FDI flows from India.
The months and years ahead promise to usher in the next phase of globalisation for Indian companies. Watch this space.