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India Still 3rd Most-favoured Destination For FDI

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From a country set to overtake China to one that can do nothing right, India's journey has been eventful to say the least. Citing a record current account deficit to stalled policy reforms, economists and industrialists have raised question mark on the India growth story in the last few months

But despite all the negativity, India still remains a major foreign direct investment destination. According to a latest UN report, major global companies consider India their third most favoured destination after China and the United States, and investment inflows could increase by more than 20 per cent both this year and next.

The United Nation Conference on Trade and Development's (UNCTAD's) World Investment Prospects Survey 2012 (Read Report) provides an outlook on future trends in foreign direct investment (FDI) by the largest transnational corporations (TNCs).

India accounted for more than four fifths of the region's FDI in the South Asian region. "The recovery took place mainly as a result of the good performance of India – which is the largest FDI recipient in South Asia and accounts for more than four fifths of total FDI inflows to the region," said the report sub-titled ‘Towards a New Generation of Investment Policies'.

The FDI outflow from India rose by 12 per cent to $15 billion, said the report. "India remained the largest investor in least developed countries (LDCs) from developing and transition economies, followed by China and South Africa," the report noted. In Africa, Zimbabwe attracted the largest greenfield investment from India.

Foreign direct investment (FDI) flows into India leapt 30 per cent to nearly $32 billion in 2011, though held back by slow pace of reforms, it still remains a long way down the league table of FDI recipients.  China drew $124 billion last year, while Brazil attracted nearly $67 billion and Russia $53 billion.

The global FDI flow is expected to rise slightly to $1.6 trillion globally in 2012 from $1.5 trillion last year, said the report. FDI flow in 2011 had exceeded the pre-crisis average rising to $1.5 trillion despite turmoil in the world economy, said the UNCTAD's World Investment Report 2012 -- Towards the New Generation of Investment Policy.

However, it still remained about 23 per cent below the 2007 peak, it said, adding, "fundamentals, high earnings and cash holdings support moderate growth".

It also said FDI inflows increased across all major economic groupings in 2011. While FDI flows to developed countries touched $748 billion, the developing nations attracted $684 billion.

Developing and transition economies accounted for 45 per cent and 6 per cent of global FDI, it added.

"The FDI inflows into India can go up by 20-25 per cent this year and by about 20 per cent next year, if the present trend continues," said Nagesh Kumar, Chief Economist, United Nations Economic and Social Commission for Asia and the Pacific, while releasing the report.

Some 179 global companies - from the manufacturing, services and primary sectors - were surveyed between February and May, on their favoured investment destinations for 2012 to 2014.

Kumar said FDI growth seems to be keeping its momentum in 2012, referring to furniture maker IKEA and Coca Cola's recent announcements to pump nearly $5 billion combined into India over the long term.

Though India's economic growth slowed to 5.3 per cent in the March quarter, its slowest in nine years,  its trends still compared favorably, Kumar said.

"Compared to many other places, India is doing better in terms of growth," he said to Reuters, adding global investors were looking at the long term prospects and wide market in Asia's third largest economy.

The report said worldwide FDI flows exceeded the pre-financial crisis average in 2011, reaching around $1.5 trillion, despite turmoil in the global economy, and is projected around $1.6 trillion this year.

Global companies are sitting on hefty cash reserves and waiting for the euro zone situation to stabilise before investing, he said.

Earlier this year India allowed full foreign ownership of single brand retailers, although late last year it backtracked on a plan to allow in foreign supermarkets.

Many investors are hoping it revives that plan soon, after Prime Minister Manmohan Singh recently took over the finance portfolio and talked about the need to address problems in the insurance and mutual fund industries, as well as taxation.

Kumar said corporate investors look at long-term prospects and recent controversies over retroactive tax proposals broadly aimed at taxing companies like Vodafone, or proposed general anti-tax avoidance rules (GAAR) would not hurt India's prospects as an investment destination.

(With agencies)