Foreign direct investment in India will increase as an expanding middle class, cheap labor force and rising salaries outweigh investors' concerns about poor infrastructure, policy paralysis and lack of governmental transparency, says Ernst & Young

Cindy Allen

LOS ANGELES , January 30, 2012 (Industry Intelligence) – According to a report by Ernst & Young Inc., foreign direct investment in India will increase as investors overlook their concerns—including India’s poor infrastructure, policy paralysis and a lack of governmental transparency—in favor of positive factors, including an expanding middle class, rising salaries, and an inexpensive and large labor force, Reuters reported Jan. 29.

Citing data provided by the Financial Times' FDI Intelligence service, the report noted that, over the first 11 months of 2011, foreign direct investment (FDI) in India had risen 13% to US$50.81 billion in comparison to the same time the previous year. The number of projects increased 25% year-over-year to 864.

2011 constituted the first time in three years that FDI in India increased.

Over the past year, business confidence in India declined as economic growth slowed to an annual rate of roughly 7% in 2011/2012, down from an annual rate of 8.5% in 2010/2011. During this time, policy paralysis and corruption discouraged investors from investing in large projects.

Of the 382 international companies surveyed for the report, nearly 70% said that they planned to either increase or maintain their operations in India.

Only 19% of the 382 international companies said that they were either planning to withdraw from or refrain from entering India.

The majority of companies reported that they were confident regarding the long-term prospects for Indian investment, particularly given ongoing financial problems in Europe and the U.S.

The companies cited cost competitiveness, an inexpensive and large labor force, cost competitiveness and robust domestic demand as the key beneficial factors to investing in the Indian market.

According to the report, automakers, technology and life sciences companies were the largest foreign investors in India last year. Automakers’ investments in the Indian market increased by 46% during this period, while foreign investment in retail projects and infrastructure decreased.

The primary source of this article is Reuters, London, England, on Jan. 29, 2012.

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