FDI Rules Changes Should Spark Indian Turnaround

Includes: EPI, TTM, WMT
by: Peter Pham

India has recently loosened up and simplified its rules on foreign direct investment making them more favorable for foreign investors, revealed Anand Sharma, Union Minister of Commerce and Industry. The Investment limit has been increased from Rs 600 crore (~$110 million U.S.) to Rs 1,200 crore (~$220 million U.S.) for projects that need cabinet approval. The national investment rate at present is around 33%-34% of the budget and the target is to increase it to 36% by the end of the country's 12th 5-year plan. Marketing diversification has been on country's radar and the country has been successful in tapping new markets in Africa and other neighboring countries.

What Ministers Have to Say?

India's Union Minister for Urban Development and Parliamentary Affairs, Kamal Nath, claims that India faces an infrastructure deficit, particularly urban infrastructure. In India, at present approximately 430 million people are residing in cities and the number will go up in the next decade to around 600 million. Currently there are 53 cities in India, and in the coming 10 years, this number can surge to 72 with a population of around one million in each city. There is an enormous need for infrastructure spending.

The main problems stem from India's serious fiscal mismanagement and the country is suffering from both current account and fiscal deficits. FDI is one method to ford that investment stream. Improving the FDI rules will help but other more pressing structural improvements to the shape of the Indian economy have to take place as well. Last week's announcement of the end of the diesel fuel subsidies is a major one, even if it is politically unpopular in the short term, especially for a number of auto manufacturers who have re-tooled to supply the rapidly-growing diesel vehicle market. Tata Motors (NYSE:TTM) diesel Nano will likely still be a good seller but the diesel SUV market is going to take a big hit in the next year.

FICCI President and India Director at HSBC Asia-Pacific Naina Lal Kidwai said India received $80 billion as payments from the Indian diaspora - Indian emigrants -- in 2012, compared to $76 billion received by China for the same period. These numbers are a sharp increase over 2011 ($58 and $57 billion respectively) and rising to more than 3% of GDP.

Importance of FDI

Foreign Direct Investment has played a significant role in the economic growth and uplift of emerging countries around the world and wooing FDI is a tricky and highly competitive process. As always, capital will always flow to where it is treated best. If anyone doubts why Singapore has a larger per capita GDP than the U.S. they should remember the above statement. My home of Vietnam is struggling with this now as foreign investors have clearly been holding out over the past two years for better deals and it looks like the rules for certain types of investing will be improving in 2013 and beyond.

India passed FDI bill in 2012 opening its $450 billion retail market to global supermarket chains such as Wal-Mart (NYSE:WMT). I've written about some of the obstacles Wal-Mart faces in India previously. This move was marked as the biggest reform in years and would encourage desperately needed investment in India. The cabinet passed a bill, which allowed for FDI into multi brand retail operations and also increased the ownership ceiling on single-brand retail stores.

These changes have not met with universal support and the latest changes caused a split within the ruling coalition. The Trinamool Congress party bowed to local public outrage and has limited foreign expansion only into those states where the ruling congress dominates locally.

It's Not That Easy in India

The main opposition parties in India, earlier this week, launched a nationwide campaign against FDI in retail, calling it 'anti-people;' blaming the current UPA government for letting India down on the economic front. The opposition parties claim that industrial production and employment generation has slowed down in the country. This is only going to intensify with the rise in diesel fuel prices in the short term.

These parties claim that allowing FDI in retail will create unemployment in the country, as small retail shops are the second-largest employment generating businesses in the country. But the need to increase FDI into India is becoming acute as flows from the U.S. and Europe have dropped significantly according to the latest news. U.S. investment through October was just under half of 2011-12's fiscal year while the E.U.'s foreign investment fell 27%.

Not even the lure of the stronger euro and dollar versus the rupee could overcome the economic slowdown. Capital was held back in fear of a eurozone breakup and worse. Now that those fears have passed in the short to medium term investment capital is beginning to flow again. Foreign equity markets around Asia are all registering strong gains, including India's. The Sensex 30 index was up 25% in 2012. It will likely need a correction as higher energy prices and more fiscal discipline from the government will create a real drag on GDP in 2013, most likely starting in Q2.

Back in October I recommended the Wisdom Tree India Earnings Fund (AMEX:EPI) as a possible way to play this. The diesel subsidy is a major game-changer from which a number of other industries can then reorient themselves. I would be a buyer of Indian stocks for longer-term accumulation on any kind of pullback.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .