Indian firms look elsewhere for business expansion

The company, Harrisons Malayalam, which is also a major tea grower, is joining an increase in outbound investment by corporate India. The overseas investment push, seen by some as the assertiveness of a rising power, is increasingly impelled by the scarcity of attractive opportunities at home.

“Plantation land in India is very scarce, and the competition is intense for the little that is available,” said Harrisons Malayalam managing director Pankaj Kapoor. “So all the plantation companies are looking at Africa, where it is still available and cheap.”

In India, rising interest rates and inflation, fierce competition in several industries and policy gridlock amid a spate of government corruption scandals have deterred investment, slowing economic growth.

“Despite India’s vast opportunities across underpenetrated sectors, companies are venturing abroad for inorganic growth,” HDFC Securities analyst Anupam Gupta said in a recent report, referring to growth through acquisition.

“While this is also partly driven by rising global aspirations for Indian companies, another reason for this is a tough competitive field, made no easier by the unpredictable regulatory environment.”

While doing business abroad diversifies risk and opens new markets, the export of capital, as inflows slow, deprives the Indian economy of investment that could add capacity and ease bottlenecks that drive inflation and crimp the economy.

Foreign direct investment by Indian companies more than doubled in the fiscal year that
ended in March to $44 billion. At the same time, inbound foreign direct investment fell by a quarter to $19.4 billion.

Within India, investment was flat on an annual basis during January to March after growing 7.8 per cent in the previous quarter.

Indian companies have made several big overseas buys in recent years, and the Reliance Industries and Tata conglomerates earn more than half their revenue abroad. However, the recent mismatch in inbound and outbound investment suggests factors pushing away investment are increasingly at play.

“To a certain extent there is a perception within the private sector of policy drift domestically,” said Frank Hancock, managing director for advisory in India for the British bank Barclays.

“As a result, some corporates are factoring in a higher degree of political risk for making investments at home than abroad,” said Hancock, who advised the Indian mobile giant Bharti Airtel in its $9 billion purchase last year of most African operations of Zain, the Kuwaiti telecommunications company.

The fast-growing telecommunications sector in India is beset by uncertainty stemming from a huge licensing scandal in which several executives have been detained in jail and put the government of Prime Minister Manmohan Singh on the defensive over its handling of corruption.

In other sectors, securing land for big projects is fraught with problems. Mining and power companies cannot dig the coal and other raw materials they need because of a slowdown in environmental clearances, sending them in search of resources in Australia, Indonesia and elsewhere.

Even though India has a severely weak infrastructure, Indian builders of roads and power plants are active overseas. GVK Power & Infrastructure, which is based in Hyderabad, signed a memorandum of understanding in January to invest $3 billion to $5 billion to Bali and Java. For India’s infrastructure builders, “the fact that they’re looking for opportunities overseas highlights the policy paralysis that exists here,” said David Cornell, a director at India Advisory Partners in Mumbai.

Few question India's attractiveness as a long-term bet. The local auto makers Maruti Suzuki and Hero Honda Motors and global giants like Ford and Hyundai Motor are adding capacity in an Indian car market that grew 30 per cent in the fiscal year that ended in March.

But near-term sentiment is weaker. Three-quarters of leading companies say they have lost faith in the government and believe that a governance crisis and policy limbo would affect economic growth and their investment plans, a recent survey found.

Saurabh Mukherjea, head of equities at Ambit Capital in Mumbai, said rising domestic competition is a bigger driver of outbound investment than policy gridlock, which combined with inflation is more of a deterrent for foreign investors.