Is India Inc set to go on 'investment' strike?

“I’m sick and tired of what’s happening here. I don’t want to live in this country anymore,” one of India’s biggest barons (not named) told The Times of India, according to this report .

It’s not difficult to understand the frustration: so many things are going wrong with the economy at the moment - and the government has just proved itself incapable of doing anything to fix them after it made a U-turn on the first economic reform introduced in some time - 51 percent foreign direct investment in multi-brand retail.

Now there’s little hope that any economic legislation will be passed.The political furore that erupted over the possible entry of Wal-Mart and Carrefour into India’s $450 billion lucrative retail market will also make foreign investors wary about putting money into the country for the long term.

That has demoralised India Inc, which is already having a pretty rough time. High interest rates, high inflation and a falling rupee have combined to increase input costs and lower consumer demand, which are squeezing profit margins.

In the aftermath of the retail FDI fiasco, four outcomes are likely:

**One,**the appetite for local investments is likely to drop even further as the realisation sinks in that the government will, most likely, be unable to introduce any economic reforms to jump start the sputtering economy. Indian companies have already been slowing down their pace of investments and several projects, especially in infrastructure, power and mining, have been put on hold.

“It will be a long pause before the next elections,” Ravi Uppal, chief executive officer and managing director of L&T Power, told The Economic Times. “On every count, the process of making infrastructure investments has been decelerated.”

Already, credit demand has dipped and top banks, including ICICI Bank, have pointed out that fresh credit disbursals have practically stopped. Whatever funds are being disbursed relate to credit sanctioned earlier.

Two, foreign investors will think twice before investing in the country for the long term. As Firstpost pointed out recently, India’s investment climate has become so indifferent that foreign investors have moved on to emerging economies like Thailand, Indonesia and Brazil, which have laid out red carpets for them.

Foreign direct investment in India fell 31 percent to $24 billion last year even as investors flocked to developing nations as a group. The chairman of Microsoft India also recently said India is no longer a preferred destination for multi-national corporations.

**Three,**Indian companies might decide to focus operations or even shift base outside the country. According to The Times of India, several Indian billionaires have said they are increasingly thinking about running their operations from cities like London and Singapore.

Policy paralysis, government red tape and increasing raids on businessmen were cited as the top reasons for the shift in mood by the newspaper. “You don’t know what regulation is going to hit,” Ajay Piramal of Piramal Lifesciences told the newspaper. “Sometimes, it’s not even rational. Very old cases are being pulled out. This doesn’t give you a sense of certainty.”

Companies might also opt to buy cheaper overseas assets and focus on overseas operations. Scaled-down local expansion plans will also reduce job opportunities and growth across sectors.

Four, given that foreign investors will become more unwilling to invest in the country and local businesses also start shying away, there will be increased pressure on the rupee. Instead of attracting more capital into the country, capital will most likely flee overseas. That could increase demand for foreign currencies like the US dollar and weaken an already weak rupee.

The currency hit an all-time low of 52.73 against the dollar in November. If capital inflows don’t improve significantly, the rupee could test those levels again.