Inorganic growth

With land frustratingly hard to get at home, India’s largest rubber producer decided to make its next investment – and its first overseas – a continent away, in Africa.

Harrisons Malayalam , which is also a major tea grower, is joining a surge in outbound investment by corporate India. It plans to spend up to $112m somewhere in Africa to buy around 10,000 acres. The overseas investment push by Indian companies, often seen as the assertiveness of a rising power, is increasingly spurred by difficulty finding attractive opportunities in Asia’s third-largest economy.

At home, rising interest rates and inflation, fierce competition in several industries, and policy gridlock amid a spate of corruption scandals that have put India’s government on the defensive have deterred investment, slowed economic growth and prompted many Indian firms to seek opportunity elsewhere. While pursuing business abroad diversifies risk and opens new markets, the export of capital, even as inflows slow, deprives the Indian economy of needed investment.With an economy steadily growing, 1.2bn people and unmet demand for everything from housing, roads and power to food and consumer goods, India is hungry for capital. Conditions on the ground, however, can make it hard to put money to work. The fast-growing telecoms sector is beset by uncertainty stemming from a massive licensing scandal that has seen several executives held in jail and put the government of Prime Minister Manmohan Singh on the back foot over its handling of corruption. Telecom was already competitive.

Opportunity and frustration
Securing land for big projects is also fraught with problems. Mining and power companies can’t dig the coal and other raw materials they need because of a slowdown in environmental clearances, sending them in search of resources inAustralia, Indonesia and elsewhere. Even state-run Coal India, the world’s biggest coal miner, missed production targets, in part because tighter environmental rules kept it from gaining access to new domestic mines, adding urgency to its hunt for mining assets abroad. In some cases, companies have permits but can’t start mining.

Even with a severe infrastructure deficit at home, Indian builders of roads and power plants are active overseas. Hyderabad-based GVK Power & Infrastructure Ltd signed a memorandum of understanding to invest $3bn to $5bn to build airports on the Indonesian islands of Bali and  India’s infrastructure builders. “The fact that they’re looking for opportunities overseas highlights the policy paralysis that exists here,” said IAP’s Cornell.

Sentiment setback
India’s economy grew at a 7.8 percent annual pace at the start of the year, its slowest in five quarters and well below forecasts. The central bank has raised interest rates 10 times since March 2010, which has taken a toll on sentiment among companies and investors.

Mumbai stocks are among the world’s worst performers this year, with the Sensex down more than eight percent. Foreign portfolio investors have put a net $494m into Indian stocks in 2011, well off the record pace of last year, which ended with $29.3bn in net fund inflows.

Few question India’s attractiveness as a long-term bet. Local auto makers Maruti Suzuki and Hero Honda Motors and global giants like Ford and Hyundai Motor are adding capacity in an Indian car market that grew 30 percent in the fiscal year that ended back in March. Near-term sentiment is weaker. A recent survey found that three-quarters of leading firms have lost faith in the government and believe a governance crisis and policy limbo will hit economic growth and their investment plans.