Investment opportunities in the GCC-India corridor continue to grow, says Alpen Capital

All GCC locations, 19th September, 2017

Alpen Capital, an investment banking advisory firm, announced the publication of its research report titled “GCC-India corridor – Investment opportunities and challenges”. This report presents the state of economic relations between the GCC and India by analyzing the trend in investment flows and the strategic government initiatives to strengthen ties. It assesses the competitiveness of countries in ease of doing business and further identifies and discusses the potential sectors for cooperation and investment in both the regions. It also outlines the investment drivers and challenges in the regions. Lastly, the report profiles some of the prominent companies in the regions.

“The GCC nations and India are strengthening historic ties across cultural, trade, economic, defense and political areas. Relations between the two regions are maturing beyond trade, as they realize the potential of strategic cooperation and growth. Though bilateral trade continues to dominate the multi-billion dollar relationship, we see that the investment flows are rising rapidly, as the regions recognize that the GCC-India corridor presents immense opportunities for investors. The GCC governments are continuously reforming policies to create an environment conducive for investment by foreign entities. On the other hand, India, as a fast growing and emerging economy, is in the process of upgrading infrastructure, creating a digitally empowered society, increasing local manufacturing and enhancing energy production. Such initiatives from both regions will create increased investment opportunities and further strengthen the relations between GCC and India”, says Rohit Walia, Executive Chairman, Alpen Capital (ME) Limited

“Acknowledging the growth potential that exists between the GCC and India, the two regions have held leadership level visits and talks in the recent years to explore new areas of cooperation. India’s share of the total investments into the GCC increased from 4.7% in 2011 to 16.2% in 2016 while GCC investments into India also continued to rise from 0.7% in 2011 to 2.95 in 2016. Sectors such as Oil & Gas, Food Processing, Healthcare, Education and infrastructure seem to be the top picks for investors looking towards GCC as an investment destination. In India, sectors such as Infrastructure, ICT, Food Processing, and Healthcare prove to be more attractive as investment opportunities for GCC companies. We are likely to see an increase in the flow of investments between the regions the improving ties and regulatory environment.” says Sanjay Bhatia, Managing Director, Alpen Capital (ME) Limited

GCC as an investment destination

The GCC nations have been able to self-fund their economic development through the wealth accumulated from the export of oil and gas. Nonetheless, foreign investments have remained imperative in diversifying revenue base, strengthening technological capabilities, improving export competitiveness and creating employment opportunities.

In contrast to the overall decline in total FDI into the GCC, investments from India grew at a CAGR of 15.9% from US$ 1.4 billion in 2011 to US$ 2.9 billion in 2016¹. During the period, India’s share of the total investments into the GCC increased substantially from 4.7% to 16.2%.

Nearly 85% of the Indian investments into the GCC were in the UAE² (see Exhibit 2), with India regarded as the third largest investor in the Emirates after the UK and the US³.

Growth Drivers

Favorable Business Climate: The GCC region offers a conducive environment for business with least demanding tax structure, low-cost electricity and natural gas, strong transport connectivity and investor-friendly free trade zones (FTZs) and Special Economic Zones (SEZs).

Re-export Potential: Due to their strategic location between the East and West, the GCC nations are seen as a gateway to the markets of wider Middle East and CIS countries. Subsequently, the UAE and Oman have developed themselves as re-export hubs and their potential is increasing with growing cross-border trade.

High Spending Power: With an average GDP per capita (in PPP terms) of US$ 61,559, most of the GCC nations rank amongst the top ten richest countries in the world. Although the prevailing economic slowdown is affecting spending power of the consumers, the situation is likely to improve in the long-term with intensifying revenue diversification measures.

Encouraging Demographics: Between 2016 and 2021, the population in the GCC is expected to grow by 6.5 million individuals. The growing consumer base comprising young, diverse and digitally enabled population will boost domestic consumption. Moreover, the region is home to 8.5 million Indians (~16% of total population), making them a vital contributor to the region’s economy. Several Indian entrepreneurs have established large business houses in the GCC.

Investment Challenges

The round of oil price meltdown has affected the oil-based revenue of the GCC countries. Subsequent austerity measures to shore up revenues have reduced government spending on infrastructure projects, consumer spending power and business activity in the region, thereby leading to a decline in investment inflows. Thus, a persistent weakness in oil prices coupled with measures such as the forthcoming introduction of value added tax (VAT) could impede investments.

A limited pool of local talent, increasing emphasis on nationalization of jobs and high attrition rates are hindering the growth of labor-intensive sectors in the GCC. Other challenges to investments in the region include diplomatic rift with Qatar and rising interest rate.

The currencies of GCC countries, except Kuwait, are pegged to the US Dollar. The currency peg is presently acting as a double-edged sword, with one end cutting the non-oil export competitiveness due to the appreciation of the US Dollar and the other hand affecting credit growth due to rate hikes by the US central bank. Such a credit environment is unfavorable for companies looking to raise capital to fund their general business activity or expansion plans.

Sector Opportunities

Sectors presenting scope for Indian investors in the GCC include oil & gas, food processing, education, healthcare, cement, tourism & hospitality, real estate, infrastructure, financial services and information communication and technology (ICT).

India as an investment destination

According to a survey on World Investments Prospects by the United Nations Conference on Trade and Development (UNCTAD), India emerged as the third most attractive FDI destinations for 2017–2019⁴.Indian government has relaxed FDI limits in various sectors to boost FDI.

Annual FDI from the GCC to India stood at US$ 1.4 billion in 2016, faster than the FDI growth from India to the GCC. The rapid growth is mainly due to substantial inflows during 2016 across the GCC countries, barring Oman. The GCC share in total FDI into India has increased over the years, but still remains low at 2.9%. Investments by non-resident Indians (NRIs) in the GCC also play a major role in the investments into India. The stability of the Indian Rupee over the years have supported remittances to the country. Although relations are progressing, India has not received large investments from the GCC countries, except the UAE – the 10th largest FDI investor in India.

Growth Drivers

Demographics: India has a large consumer market with a population above 1.3 billion in 2016, which is estimated to increase by over 88 million individuals by 2021. Not only is the sheer size an advantage, but also the factors like diversity, age distribution, gender mix and urbanization that are driving consumption.

Economic Growth: The spending power in India is also rising, owing to a rapidly growing economy. The country’s real GDP is anticipated to grow at an annualized rate of 7.7% by 2021, making the country a prominent consumer goods market.

Structural Changes: The Indian economy is transforming, given the rapid pace of reforms such as easing of FDI policies, financial inclusion and the introduction of a unified tax structure. The government has also undertaken initiatives like Make in India, Startup India and Digital India to draw investors across sectors.

Investment Challenges

In India, underdeveloped infrastructure is a major obstacle to attracting investments into the country. Although several infrastructure projects are underway, the timely execution within the budgeted cost would be the key to fast-tracking developments.

While the presence of a large pool of low-cost labor is an advantage for India, the existence of trade unions has interrupted industrial operations and triggered losses in the past. Hence, there is a dire need to reform the labor laws in a bid to attract foreign companies to be a part of the country’s Make in India initiative.

A multi-layered government structure has led to lack of uniform policies and procedures across states and perennial elections have affected policymaking. Corruption is considered as a major obstacle by companies operating in or planning to invest in India. Even though the government has taken stringent steps such as demonetization to curb corruption practices, the framework mechanism needs to be strengthened to improve accountability and enforcement.

Although India has implemented a unified tax structure (GST) in July 2017, the multi-tier structure and complex rules of the new tax makes it complicated. GCC-based investors, who operate in a relatively less-demanding tax structure, may find it difficult to interpret the new tax structure and subsequently act as a hurdle in their investment plans in India.

Sector Opportunities

The sectors offering investment opportunities in India include infrastructure, ICT, healthcare, food processing, financial services, aviation and oil & gas.

The immense collaboration opportunities and growing domestic consumption would fortify business relations between the GCC and India. As a fastest growing economy with over 1.3 billion consumer base, India offers a spectrum of opportunities. On the other hand, the presence of an affluent and diverse consumer base, alongside the economic diversification efforts, present great potential for Indian firms in the GCC.

Please click here to access the GCC-India Corridor report online.

1 Source: Reserve Bank of India (RBI)
2 Source: RBI
3 Source: Federal Competitiveness and Statistics Authority
4 “World Investment Report 2017”, UNCTAD; A business survey conducted by UNCTAD among multinational executives during the initial months of 2017