India’s stalling economy is set to boom again, thanks to a renewed drive to secure more inbound foreign capital, senior officials said.
Speaking on the sidelines of the Asian Development Bank meeting, India’s finance minister P. Chidambaram pledged to add at least two percentage points to economic growth within two years.
“We showed between 2004 and 2008 we were capable of growing at an average of 8.5% [a year],” he told Emerging Markets. “We have slipped in the last five years. But why should we not climb back to 8%? I’m giving myself three years to get there.” Chidambaram said growth would rebound to 6% this year, 7% in 2014, and 8% in 2015.
Chidambaram said much of this growth would come from renewed foreign direct investment (FDI) inflows. India was once a key destination for foreign institutional and portfolio capital, but Naina Tal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry (FICCI), said FDI has “eased off” considerably in recent years.
The economy stalled and key infrastructure projects, from power plants to highways, ran into a multitude of obstacles. FDI into India fell 13.5% in 2012 to $27.3 billion, according to Unctad.
Chidambaram pointed to the landmark ruling in December 2012 allowing foreign multi-brand retailers like Walmart and Tesco to access the local market.
That deal is already bearing fruit. On Thursday, India’s Cabinet Committee on Economic Affairs approved a $2 billion investment by Ikea, which will see the Swedish home retailer open 25 stores across the country.
December’s so-called “FDI law” also permits foreign airlines to buy stakes in Indian carriers. Etihad Airways of the UAE recently bought 24% of Jet Airways.
Chidambaram pledged this would be just the start, adding he was “confident in further advances in the coming years”, with foreign investors pushing further into sectors including pension funds, broadcast media, and insurance.
Foreign investors are currently permitted to own 26% of joint ventures with Indian insurers and a bill seeking to raise the ceiling to 49% is currently making its way through parliament.
Foreign investment is key to India’s future but securing new inward capital will be a long-term process, officials warned. “More inward investment will help boost India’s economic fortunes,” Raghuram Rajan, chief economic adviser to the government in Delhi, told Emerging Markets.
“But it will take time for all of that investment to come in and for growth to get moving again. After all, we only passed the FDI law a few months ago.”
Rajan added that he wanted more investment – both foreign and local – to flow into logistics, a process that will help keep a lid on the country’s consumer prices.
“We are examining all possibilities for FDI, but really what we need is capital flowing into areas that benefit directly from technology. One good example is better logistics chains, which will help us transport food from the farmer to the tabletop with less wastage. That will be a boon for both farmers and consumers.”
Didar Singh, secretary-general of FICCI, insisted that inward investment posed no direct threat to Indian corporates. “I embrace all FDI,” he told Emerging Markets. “We want to see investment from all sectors coming in. We don’t distinguish between local and foreign investors.”
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