This is the best time for foreign investors to enter India

September 12, 2013
September 12, 2013

Everyone’s fretting over the rupee’s decline against the dollar. Concerns are mounting over rising import bills and ensuing inflation. The concerns are not unwarranted, but this cloud has a silver lining: The rupee’s devaluation and government’s changes on the rules governing foreign direct investment (FDI) are good news for investors in India.

While several factors are causing the rupee’s fall, the most significant one is the (proposed) end of quantitative easing (QE) policies in place since 2010. By announcing the “tapering” of QE in a gradual manner a few months back, the US Federal Reserve opened the floodgates for a rush of funds back into the US market. American equities have risen up to 20% in the recent past, but the shift in capital has come at the expense of emerging markets. Just five years ago, amid financial crisis, these economies were flooded with funds as investors chased higher returns (US treasuries have been at near-zero since the Lehman collapse). Although there is considerable debate over the timing and extent of the taper, it is pretty much consensus view in Washington that the days of $40 billion monthly bond purchases are coming to an end, barring a budget/debt ceiling crisis that takes us back to a double-dip recession.

On its part, India’s central bank, the Reserve Bank of India (RBI), has done well to not impose restrictive capital controls and has let the rupee find its own valuations under the given circumstances. For investors, this represents opportunity—and potentially, a very lucrative one.

Attractive valuation

The Big Mac Index, a tool devised by the Economist to measure exchange rates, uses the purchasing power parity (PPP) method case by comparing the prices of a McDonald’s Big Mac in various countries. Today’s index suggests that, at the moment, the rupee is undervalued against the dollar by as much as 70%—making it one the most undervalued currencies in the world. It is interesting to note that over the rupee has lost 50% of its value over the course of the past five years. This presents an enormous opportunity for a foreign investor looking at a long-term India play allowing the investors to acquire Indian assets at a very attractive valuation. For example, assuming all other variables to be static, an asset worth $100 million in 2008 can now be potentially purchased at under $60 million at today’s exchange rates. Such gains cannot be ignored given the undervaluation of the rupee and potential for a long-run downward slide. This should interest global players looking to acquire Indian companies which would now be available at significant discounts from their peak valuations.

On a similar note, the conversion rates should also serve as a catalyst to private equity deals from offshore funds and venture capital interest in the Indian start-up ecosystem. Investors’ dollars are able to derive greater mileage in India than ever before.

For global manufacturing and service industries, the devaluation of the rupee works in a large way towards effectively negating rising wages, which in the recent past undercut emerging market competitiveness. Now the rupee’s devaluation, this should definitively be of help to companies looking to locate themselves in India or to simply source products and services from India. The cost of setting up a business in India has definitely declined in dollar terms; this should help global small and medium enterprises who were hesitant on their India plans to finally make the leap.

The decline in such costs may even work toward balancing out drawbacks such as inefficient hiring practices, poor infrastructure, power issues—the standard peeves of foreign businesses operating in India. The services sector, which is not as heavily dependent on the infrastructure that India currently lacks, will definitively reap the rewards far more than the manufacturing sector.

FDI measures

However, it is clear that further increases in GDP growth rates cannot be sustained without adequate reforms and greater support for industry and private enterprise. The markets have spoken and the government has now instituted a new wave of reforms to make India more competitive and business-friendly, a welcome and necessary gesture. The change in stance towards FDI and vocal advocacy of its merits are steps in the right direction, even if the change of attitude has been compelled by the current account deficit.

Seeing the need to bridge the current account deficit and the need for foreign investment to sustain growth, the government has opened a number of sectors up to FDI and has enhanced the limits of permissible FDI in several other areas. It is now possible for foreign entities to acquire 100% ownership in Indian businesses in telecommunications, and it is widely expected that FDI in e-commerce may also get the nod soon. This is in addition to relaxations in other sectors such as real estate, multi-brand retail, power, asset reconstruction, and credit information. Furthermore, the government has expressed urgency in approving investment proposals subject to approval from the Foreign Investment Promotion Board (FIPB).

There are unmistakable signals that the government recognizes mistakes past and wants to ensure they are not repeated. India’s finance minister has promised a non-adversarial tax regime for all business operating from India and has been on a global road show to roll out the proverbial red carpet for investors. As things stand, in most sectors the numbers of approvals as required by foreign-owned business are in no way greater than those required by Indian businesses. Companies willing to stay the course can definitely reap benefits in India.

Strong consumer story

Despite slowing down, India is still growing at 5-6% of GDP on an annual basis; the domestic consumption story is still strong, as is consumer confidence. The anticipated export boom is only going to help fuel upward-looking ambitions of the Indian middle class.

India is definitely not the easiest country to do business in. Our complex regulation and an unsettling amount of bureaucracy can appear to be a deterrent to foreign businesses looking invest in India. All of this does not diminish the fact that the prize for such investors who decide to establish in India now is unsurpassed by few countries in the world. India has a massive middle income population. A substantial number of individuals in this group have risen from lower income segments and have a consumption appetite that is keeping the wheels of the economy churning ever faster.

The Indian growth story is also unique in that it is powered less by exports to developed economies and more so by internal consumption. The devaluation of the rupee shall only further encourage local manufacturing and exports. Therein lays the opportunity for those who recognize it. It may thus be the signal that heralds India’s coming as an investment destination for the longer term.

We welcome your comments at ideas@qz.com.

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