Is India the Emerging Market of Choice?

By Amy Coburn and Frankie Cooke Mar 11, 2014

As an emerging economic powerhouse with one of the world’s largest populations, India has become one of the top prospects for foreign overseas investment, even though the country has experienced an economic slowdown in the most recent quarter. According to recent research and analysis, in just the last decade, investment in India represented a spend of $31 billion out of the $645 billion spent by the London Stock Exchange’s FTSE 100 companies on mergers & acquisitions (M&As), a figure higher than for any of the other BRIC (Brazil, Russia, India, China) countries.

Focus on India

The Indian economy expanded at an annual rate of 4.7 percent in the three months to December 2013, which was down from 4.8 percent in the previous quarter. Various factors such as the depreciation of the rupee, weak economic growth and volatile stock market fluctuations have been cited as causes. According to India’s capital markets regulator, in the first two months of 2014, foreign institutional investors bought Indian stocks of around $450 million, compared with $8.4 billion in the first two months of 2013, and $7.16 billion in the same period in 2012. It appears that foreign investors are holding off on making big bets ahead of federal elections this summer.

India’s election commission has set April 7, 2014, as the start of parliamentary elections, and they are likely to be important for India’s long-term growth and attractiveness to investors. The Bharatiya Janata Party candidate for prime minister, Narendra Modi, is regarded as “business-friendly” and consequently viewed by many foreign investors as a trigger for a stable government. This pro-development and business mind-set is hoped to have a positive impact on the Indian economy and equity market.

Prior to this, during August 2013, foreign investors withdrew money from India due to the rupee’s record low against the dollar. A London-listed company which launched a fund five years ago terminated its investment in India because of poor returns and announced that its future investment focus would be infrastructure schemes in the U.K. and continental Europe. According to one global private equity firm, high fiscal and current account deficits have made India the second-most risky emerging market. The lack of foreign money has meant that Indian stocks haven’t gone anywhere this year.

However, positive signs are appearing: the International Finance Corporation—the investment arm of the World Bank—announced it has doubled its three-year global bond program to encourage foreign investment in India and promote capital markets. British Prime Minister David Cameron’s Indian trade mission also promises to double trade with India by 2015. Significantly, a deal approved by the Indian government between British retailer Tesco and India’s Tata Group to launch a chain in India is a positive sign that India is liberalizing its restrictive retail laws. It is proposed that Tesco will invest $110 million, taking a 50-percent stake in Tata Group’s Trent Hypermarket. And it’s not only U.K. companies seeking investment opportunities in India—H&M, the Swedish clothing chain, secured in 2013 the approval from the Indian government to open stores across India. Restrictive bureaucracy may have put off certain investors in the past, but the 2013 Companies Act, aimed at easing the process of doing business in the country and improving governance in India, is surely due to further facilitate business.

2014 to Be Key

In October 2013, Ernst & Young predicted that growth for rapid markets in 2014 would be 4.7 percent (a marked reduction from its 5.7 percent forecast in July 2013). In terms of where investors look, it seems 2014 will be a key year. This is the fifth consecutive quarter that India’s annual growth has been below the 5 percent mark, yet there is much optimistic sentiment for 2014, especially in the face of India’s new elections. If history is a guide, investors should look forward to this period—the benchmark Bombay Stock Exchange Index has gained in the month before elections in each of the previous six elections with the biggest advance coming in 2009 when the United Progressive Alliance won a majority. There is no reason to expect differently this year.

Amy Coburn is an associate and Frankie Cooke is a trainee solicitor in Faegre Baker Daniels’ London office.

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