India is the 5th largest economy in the world and the fastest-growing emerging economy. As of 2019, India’s nominal GDP stands at $2.94 trillion and it aims to aggressively accelerate this growth and hit the $5 trillion mark by 2025. The negative effects of the COVID-19 pandemic have affected the entire world. While the world searches for a vaccine, foreign investors of all sizes, be it FPIs or FDIs, are looking for safe-haven investment destinations which offer higher returns compared to their home country.
In the near future, the global economy is expected to contract by 4.9%. According to the latest IMF report, India is set to come out strong from this pandemic with one of the highest growth rates globally in 2021. This can be attributed to the robustness in the economic base that the country possesses.
In a globalised economy, foreign institutional investors which include MNCs and corporates have witnessed the consequences of putting all their eggs in one basket. Once China, the ‘world’s factory’ shut down, the supply chain disruptions were felt across the globe.
The Post-COVID World
In such unprecedented times, agile but decisive investment decisions can be the key to unlocking superior returns. Foreign institutional investors are now looking to not only diversify their supply chains but also invest in well-grounded economies. India provides this platform through its friendly foreign investment policies and availability of inexpensive skilled labour.
Post the dotcom bubble burst in 2002, India proved to be an excellent destination for foreign companies to outsource their software functions, thus setting up the ‘world’s back office’. Fast forward to 2020, the 400 million-strong workforce of India provides a strong resource for companies to employ at inexpensive rates as even the once labour-intensive manufacturing industry will transition to automated machinery over the next decade. This will require a different skill set to operate and India possesses this in abundance. In 2019, due to China’s demographic features, its workforce decreased in size. India’s growing skilled workforce provides a much more sustainable resource.
Another major factor of production, i.e land, is being offered at favourable rates to foreign companies which are looking to diversify their supply chain processes to India. The Indian government is in the process of identifying 4.6 lakh hectares of land, of which 24% is in industrial areas. This along with other financial incentives like tax breaks, tax holidays, etc. are all being looked at in a bid to attract foreign investment.
India witnessed an FDI inflow of $51 billion in 2019 which was a 20% year-on-year increase. While the United Nations Conference on Trade and Development (UNCTAD) has projected a decrease in inflows through 2020, it also foresees foreign investment to pick up and increase exponentially over the next decade. Signs of early investment which have the potential to effectively augment the economic output of the country comes in the form of Google’s plan to invest $10 billion over the next 5 to 7 years.
While FDI investments are made with the expectation to drive macro-economic growth over many decades, FPI investments are comparatively much smaller in size and are invested in liquid assets in search of capital gains over a much shorter term. These investments generally follow FDI investments and are affected by factors such as interest rates, real estate markets and stock market volatility. In the current economic climate with falling interest rates and low rental yields, equity markets are a more lucrative investment option for investors hoping to beat inflation.
The benchmark indices returned 16% CAGR from the start of the bull market in October 2008 till the peak of the markets in January 2020. As an emerging market, similar growth in the equity markets can be expected over the next decade with accelerated economic growth. With near-zero interest rates in developed countries like the USA as well as in Asian countries like Japan, India offers foreign investors an opportunity for interest rate arbitrage. Investors in Indian sovereign bonds stand to reap healthy returns from one of the highest credits rated countries in the world.
No one can predict when the Post COVID world will arrive or what it will look like but some of the key economic lessons learnt through this period include the need for a well-diversified, robust supply chain process. So, when the demand for goods and services finally returns, it can be met. India’s friendly political relations with the global economy and lucrative factors of production will stand it in good stead in the Post COVID world.
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