Decline in Foreign Direct Investment inflow: Stressed telecom, uncertainty in pharma to blamehttps://indianexpress.com/article/explained/decline-in-foreign-direct-investment-inflow-stressed-telecom-uncertainty-in-pharma-to-blame-5755389/

Decline in Foreign Direct Investment inflow: Stressed telecom, uncertainty in pharma to blame

While FDI in telecom sector fell during 2018-19 to $2.67 bn from $6.21 bn a year ago, inflows in pharma dropped to $266 mn in 2018-19 from $1 bn in 2017-18.

Foreign direct investment, FDI, FDI India, FDI in pharma, FDI in telecom, Indian express
Notably, according to official data, FDI in India declined for the first time in last six years in 2018-19, falling by 1 per cent to .37 billion as overseas fund inflows subsided in telecom, pharmaceuticals and other sectors. (Reuters/File)

Stressed financial condition of the telecom sector — which saw a wave of consolidation — is being deemed as the primary reason behind the fall in foreign direct investment (FDI) in the sector during 2018-19 to $2.67 billion from $6.21 billion a year ago.

Notably, according to official data, FDI in India declined for the first time in last six years in 2018-19, falling by 1 per cent to $44.37 billion as overseas fund inflows subsided in telecom, pharmaceuticals and other sectors. FDI in pharmaceuticals fell from $1 billion in 2017-18 to $266 million in 2018-19, with a combination of regulatory uncertainty in the country, the lack of a conducive environment for companies to invest in growing opportunities in this space among the reasons for this trend.

READ | FDI at $44.37 billion in FY19; inflows down in pharma, telecom

According to director general of Cellular Operators Association of India, Rajan Mathews, “The principal idea behind the fall in FDI in the sector is its stressed financial condition. Because of the condition, companies have been having a hard time bringing in foreign investment.

Earlier, FDI was mainly being brought in to expand infrastructure but with consolidation happening, we have seen that Idea and Vodafone are now making joint investments so that is taking the number down. So it is a combination of a number of factors.”

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“Going ahead, as the sector stablises, the government provides relief and the economy grows as expected, we can expect the FDI levels to bounce back,” he added. While operators may have slowed down on widening their infrastructure footprint during the last financial year, experts also believe that as firms gear up for 5G, there will be an uptick in investment, which will also reflect in the FDI levels for this year.

Further, a relatively more stable industry could bring in pricing discipline among telecom operators that could improve the financial condition of the sector going ahead. “We expect minor improvements with (industry) revenues estimated to grow by 6 per cent on-year and operating income or Ebitda by 20 per cent on-year in FY20, driven by benefits of higher data usage, and a relatively more consolidated and stabler industry structure, resulting in some pricing discipline,” ratings agency ICRA said in a recent statement.

However, during 2019-20 the revenues of the Indian telecom sector are still expected to be lower than its peak of 2015-16.

Drop in pharma FDI

According to industry experts and some global pharmaceutical companies in the country, the reason for a drop in FDI is a mix of regulatory uncertainty in India, the lack of a proper environment for companies to invest in growing opportunities in this space as well as divestments by global firms to release capital in the last few years.

“There is a lot of uncertainty in the pharma sector, whether it has to do with the pricing pressures in the US markets, FDA inspections and dark clouds over drug approvals. In the domestic market, also, there is a push towards generic-generics and reduction in drug prices,” said a senior executive of a global drug maker. “For an investor, it doesn’t give confidence of an improved sustainable profitability,” the person told The Indian Express.

“The future of the pharma industry is not in tablets and capsules,” the person said, adding that multinational firms would “rarely, if never,” set up facilities to manufacture such products when they have the option of relying on contract manufacturers. The key FDI inflow into the pharmaceutical sector in India was through inbound mergers and acquisitions, and such “large” have happened in the last few years, but have not occurred in the 2018-19 financial year, said Kartikeyan Thangarajan, associate director, India Ratings & Research (Fitch group).

“NLEM (National List of Essential Medicines) continues to be overhang on companies operating in the domestic space as more drugs come under the NPPA (National Pharmaceutical Pricing Authority) scanner,” added Ankit Bhemre, senior analyst, India Ratings & Research (Fitch Group).