The Tata group's bid for Corus hangs in the balance. When Corus management indicated its acceptance of the Tata offer, the response in India was euphoric. Corporate India, the pundits said, had come of age. Indian companies would now sally forth and conquer. We should soon expect outward FDI to exceed inward FDI.
Calm down, folks. Yes, there will be overseas acquisitions, more so as the rupee appreciates. But not many companies are in a position to bring off deals of this size- they do not have the financial muscle or the stature to put together deals of this order. Others, such as software companies, have chosen to go in for small acquisitions ($50 million or so) because their problem is managing high rates of organic growth.
Not just software companies but those in pharmaceuticals, automotives and bio-tech find they are able to compete in the international marketplace from out of India. Knowing the hassles that go with large acquisitions- the majority of cross-border acquisitions fail to enhance shareholder value- they will play it safe and make relatively small acquisitions.
As for the impact of balance of payments, we need to factor in the following:
i. The bigger deals will be funded overseas, so will not entirely involve outward FDI.
ii. Most acquisitions, as stated above, will be small.
iii. Inward FDI is today very low in relation to the potential of the Indian economy and is bound to rise sharply.
For these reasons, net FDI (inward minus outward) will remain positive.
Read my ET column on the subject.
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