Retail therapy

The move by RBI to allow banks to offer financial assistance to Indian companies for acquisition of companies abroad is welcome. Banks can now lend to Indian companies for the acquisition of equity in overseas joint ventures/wholly-owned subsidiaries or in other overseas companies, new or existing, as strategic investment. This has been done after RBI had already raised the ceiling for outward FDI from 100 per cent to 200 per cent of a company’s net worth under the automatic route. This measure should reinforce the trend of Indian companies investing abroad. Recently India has seen a sharp rise in outward FDI. News of one of the bi-ggest Indian FDI abroad came this week with India’s Tata Chemicals Ltd’s offer to buy the Egyptian Fertilisers Company at $519 million. Other large acquisitions include Tetley, Daewoo and Natsteel Asia by the Tatas.

Outward FDI flows from India, particularly in manufacturing and IT services, have increased significantly since the late 1990s. India’s outward FDI stock grew from $0.6 billion in 1996 to $5.1 billion in 2003. This took India to 14th place in terms of outward FDI stock among developing economies. Its annual average outward FDI flow during 2001-2003 reached $1.1 billion, comparable to that of Malaysia. Most of India’s FDI is still in manufacturing, but it has begun to grow rapidly in IT services, particularly through mergers and acquisitions. Access to markets, natural resources, distribution networks, foreign technologies and strategic assets like brand names are the main motivations for outward FDI. Research suggests Indian firms use outward FDI to establish distribution and marketing networks abroad. This enhances their ability to provide sales and after sales services to global buyers.

Outward FDI has been made possible by the liberalisation of government policies and relaxation of regulations on FDI abroad. But the most important factor is the increased competitiveness of Indian industry after foreign competition was allowed into India. Thus, companies with the capacity to compete within India acquired the capacity to compete with foreign companies elsewhere.