Just over a year ago, outward foreign direct investment (OFDI) from India seemed to be on a path of rapid and sustained growth. Its annual average growth of 98 per cent during 2004-07 had been unprecedented, much ahead of OFDI growth from other emerging markets such as China (74 per cent), Malaysia (70 per cent), Russia (53 per cent), and Korea (51 per cent), although from a much lower base. Much of this recent growth had been fuelled by large-scale overseas acquisitions, however, and it faltered when the global financial crisis that started in late 2007 made financing acquisitions harder.

How will internationalising Indian firms deal with the global crisis? Will they benefit from the global meltdown – for example, from cheaper asset prices ? or become cautious and retreat?



Slowdown in 2008, dim prospects for 2009

The global economic crisis has made Indian firms wary of further expansion abroad. Consequently, actual Indian FDI outflows, which rose to a historic level of nearly $18 billion (Dh66.13bn) in 2007, fell by 6 per cent in 2008 to under $17bn. This is the first absolute decline in OFDI since 1999. The fall in Indian OFDI is in line with the worldwide decline of 15 per cent in 2008, although it contrasts with China's doubling of its OFDI in 2008. The contraction in Indian OFDI is continuing in 2009, falling to $4.7bn in the first quarter of the current year, a 14 per cent decline over the same quarter last year.

The trend in Indian overseas acquisitions in January-June 2009, as compared to the corresponding period in 2008, confirms the decline. Between these two periods, the value of such acquisitions fell by 65 per cent, from $8bn to under $3bn, and their number fell from 140 to 28.

This 2008 and early 2009 plunge in Indian OFDI has been asymmetrical across sectors and host regions. Indian OFDI in the primary and tertiary sectors has been more resilient in the crisis than OFDI in manufacturing. Between 2007 and 2008, acquisition-led Indian OFDI grew in the primary sector (10 per cent) and in services (19 per cent), while it fell steeply in manufacturing (-79 per cent). The share of manufacturing in Indian OFDI flows thus fell from 84 per cent in 2007 to 49 per cent in 2008. The share of the primary and services sectors in Indian brownfield (made through mergers and acquisitions) OFDI grew to 20 per cent and 31 per cent, respectively. In the first half of 2009, the negative impact of the slowdown spread to the services sector. Only the primary sector remained robust, led by ongoing increases in OFDI in the oil segment and the revival of OFDI in mining.

The decline in Indian investment is widespread among recipients. Among host regions, the fall in Indian brownfield investment was steepest in the developing world (-79 per cent) in 2008, with Asia, which had accounted for eight per cent of the investment in 2007, falling by 85 per cent. Africa did much better, by receiving 69 per cent more brownfield investment in 2008, but this from a very low base of $111 million. Acquisitions in the developed world in 2007 had been led by Europe and fell by nearly 54 per cent in 2008. In North America, they fell by 75 per cent.

In the first half of 2009, Indian FDI flows into Africa were sharply higher than the first half of 2008, because of the region's oil and gas resources, while they fell in other regions. Looking at countries, the two countries accounting for most of the value of Indian acquisitions in both 2007 and 2008 differed sharply in 2009. Indian brownfield investment in the US during the first half of 2009 actually grew by six per cent over the first half of 2008, while it fell by 99 per cent in the United Kingdom.

Undertaken mostly by private enterprises, except for a few public-sector firms in the energy sector, Indian OFDI has been driven by several factors, including global growth, business opportunities and increased competition. The effect of market conditions turning adverse in 2008 can be seen in the actions of Indian companies such as Sakthi Sugars, Reliance Industries, Vardhman Polytex and Suzlon Energy, which are reportedly wrapping up (or disinvesting from) some of their overseas affiliates because of the current economic meltdown.



What led to the downturn?

Several factors account for the decline in Indian OFDI. The global and domestic slowdown in growth was one of these. The advanced economies are predicted to see a sharp fall in their aggregate real GDP growth rate from 2.7 per cent in 2007 to 0.8 per cent in 2008 and -3.8 per cent in 2009, signifying further reduction in overseas demand. Real GDP growth within India fell from above nine per cent in October-December 2007 to just five per cent in October-December 2008. This has led to an erosion of business confidence, reduced consumption and slowing investment, choking off both the domestic and overseas expansion of Indian firms.

The credit crunch in both Indian and overseas markets was another factor. Although the Indian banking sector did not suffer quite as much from its exposure to distressed global financial instruments and institutions as banks in some major economies, suffer it did and therefore adopted a cautious lending policy in 2008. This in turn led to several domestic and overseas projects being postponed.

The global crisis had a significantly negative impact on other financial sub-sectors such as the Indian equity, money and foreign-exchange markets. India's benchmark equity index, the Sensex, had fallen sharply by December 2008, by 48 per cent from its highest-ever level reached in December 2007. All this has restricted Indian firms' access to cheap sources of finance and reduced their profitability. Many Indian companies that had acquired overseas units in the recent past, such as Suzlon Energy, Tata Motors and Hindalco, had to suspend their rights issues and faced difficulties in raising resources.

The sudden depreciation of the Indian rupee against the US dollar in 2008 also led to heavy losses for many export-oriented Indian companies that had acquired long-term forex derivatives. Several Indian companies, which had borrowed heavily abroad to finance their global acquisitions and greenfield projects during the period of rapid appreciation of the rupee against the dollar, encountered difficulties in meeting mounting overseas debt obligations. The weak rupee and collapsing stock prices reduced Indian companies' ability to engage in M&As.

Continued falls in export earnings, especially during October-December 2008, further aggravated the condition of export-dependent Indian firms in a large number of sectors, including software, gems and jewellery, leather, textiles, auto parts, pharmaceuticals and food processing. Since exporters are leading outward investors, lower export earnings had a significant impact on Indian OFDI in 2008. The sudden collapse of commodity prices such as crude oil, natural gas and metals also moderated the outward expansion of natural-resource-seeking Indian firms. Finally, anecdotal reports suggest that Indian firms with overseas affiliates ? Bharat Forge, Havells India, Hindalco, Punj Lloyd and Tata Communications ? have suffered severe consolidated losses in recent quarters.



Future prospects

Recovery in Indian OFDI will depend on the revival of global and domestic growth, improvements in corporate profitability, and the easing of financing from banks and the equity market. The first quarter of 2009 registered stronger GDP growth in India than expected, even though global growth went down. If domestic growth turns out not to be sustainable, however, OFDI may not recover.

Recent overseas deals, such as the proposed merger of Bharti Airtel and South Africa's MTN for $23bn and Sterlite's $1.7bn bid for US-based copper-mining firm Asarco, suggest that 2009 might see some surprises. Moreover, not every Indian company has financing problems. There are some cash-rich Indian firms, including SMEs, which have not undertaken FDI in the past but may be interested in doing so in the future. These firms can be expected to explore acquisitions, given the cheap valuations of foreign assets.



- The author is Associate Professor at the Sardar Patel Institute of Economic and Social Research in Ahmedabad, India. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu)