India: FDI and Savings are the key

Friday, December 11th, 2009

This post is a guest contribution by Rebecca Wilder*, author of the of the News ‘n’ Economics blog.* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

India’s in the headlines today  (Dec. 8).

From Bloomberg:

J. Kumar Infraprojects Ltd. plans to raise as much as 1.01 billion rupees selling 5.6 million shares to large investors, according to a share-sale document.

From Bloomberg:

GE Hitachi Nuclear Energy, which plans to build an atomic power plant in India, said as much as 70 percent of the components may be made locally to reduce costs and also exported to customers in Europe and the U.S.

From the Financial Times:

International power companies from Russia, France, the UK, the US and Canada are flocking to India seeking opportunities to help one of the world’s fastest-growing economies meet its energy demands. The contribution of nuclear energy in India is forecast to rise from 4,000MW to as much as 470,000MW over the next 40 years.

India’s hot. And accordingly, multinationals around the world want to set up shop and produce directly in the world’s second most populated country, 1.16 billion and growing (foreign direct investment, or FDI).

As is illustrated in the graph above, foreign domestic investment facilitates the growth of the capital stock that would be unattainable given its relatively lower domestic saving. FDI, or inward fixed investment, is one of the most important factors in facilitating growth for a developing economy (one whose investment growth is not subject to diminishing returns).

Recently, India has made much progress in attracting new FDI - its growth surged in 2009 in spite of the global economic recession.

The chart illustrates the inflow (not net) of foreign direct investment to Brazil, India, and Russia. Stemming partially from big FDI (hence capital investment), India grew quickly in 2009 - 3Q growth was reported to be a huge 7.9% y/y.

And the OECD recently hailed India for its efforts to lower barriers to entry:

The OECD’s Investment Policy Review of India says India has designed policies to encourage investment as part of market-oriented reforms since 1991 that have paved the way for improved prosperity.

“Restrictions on large-scale investment have been greatly relaxed. Many sectors formerly reserved to the public sector have been opened up to private enterprise. Import substitution and protectionism have been replaced by an open trade regime,” the OECD report notes.

But further reforms are needed. India’s policy framework for FDI still remains restrictive compared with most OECD countries. Meanwhile, its investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity.

Point: India recently made great headway in opening borders to direct investment, but more is needed. For example, India’s foreign direct investment levels are similar to the other BRIC countries (ex China in the first chart), but per-capita income is by far the smallest.

Going forward, saving (including the government, which poses a very large risk, and for another post) and investment are critical to the outlook of the economy. It’s up to policymakers in India to keep the economy on a sustainable growth path.

The Wall Street Journal posted a nice article today on the need to stimulate opportunistic entrepreneurs in India. Interesting stuff.

Rebecca Wilder

Tags: Assistant Professor, Atomic Power Plant, Bloomberg, BRIC, Canada, Capital Investment, Capital Stock, China, Diminishing Returns, Doctorate, Domestic Investment, Emerging Markets, Fdi, Financial Times, Foreign Direct Investment, Global Economic Recession, Important Factors, India, Inflow, Investment Growth, Investment India, Lly, Multinationals, Nuclear Energy, Rupees
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World’s Cheapest Car Unveiled

Thursday, January 10th, 2008

Click to watch video from ABC News

World’s Cheapest Car Unveiled

ABC News Jan 10 The Tata Nano is 10 feet long and costs $2,500.

What exactly does a $2,500 car mean for India, and for that matter, the world? How long before these cars are exported. Ratan Tata has vindicated himself of his critics, and launched a revolution for the future of car ownership and the global auto industry. Imagine, 8 years ago, Tata Motors (TTM:nyse), India’s largest manufacturer of light CV trucks and buses was not even in the passenger car business…expectations are for the company to move approximately 1 million of this model annually to start.

The launch of the Nano lays the platform for India to emerge as the hub for frugal engineering, the ability of Indian engineers to produce more with less resources. Tata’s incumbent best-seller, Indica, which was developed in India for $350-million, would have cost three times as much to develop in Detroit.

India automaker unveils the world’s cheapest car,

Reuters Published: Thursday, January 10, 2008

Reuters

NEW DELHI — India’s Tata Motors Ltd unveiled the world’s cheapest car on Thursday, bringing car ownership closer to millions of consumers in emerging markets.

The 4-seater Nano, with an engine around 625 cc, will have a dealer price of 100,000 rupees (US$2,500), and will go on sale later this year.

Tags: 8 Years, Abc News, Automaker, Best Seller, Business Expectations, Car Business, Car Ownership, Desc, Emerging Market, Emerging Markets, Global Auto Industry, Incumbent, India, Indian Engineers, Information, Launch, Markets, Nano, New Delhi India, Nyse, Passenger Car, Reuters, risk, Rupees, Tata, Tata Indica, Tata Motors Ltd, Ttm, Video
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