Inward investments have continued to rise since the sharp drop witnessed in 2009, following the global financial crisis. Hiccups notwithstanding, foreign investors see huge long-term growth potential in the country.

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In fact, going by Ernst & Young’s first Indian Attractiveness Survey, as much as 75% of global businesses already present in the country are looking to considerably expand their operations going forward.

The survey also confirms that India is undergoing a transition, both in terms of investor perception of its market potential, and in reality.

“With GDP growth projected to surpass 8% annually and the number of people in the Indian middle class set to treble over the next 15 years, with a corresponding impact on disposable income, domestic demand is expected to grow exponentially. India’s young demographic profile also helps it provide an increasingly well-educated and cost-competitive labour force. These factors put India in a good position to attract an increasing proportion of global FDI,” said Rajiv Memani, country managing partner, Ernst & Young India.

According to market data, owing to a slowdown in global investment flows, the number of foreign direct investment (FDI) projects in 2010 remained constant compared with 2009 at around 750, said the report.

The relative decline of the United States as a source of FDI in India also continued in 2010. As a result, the number of US FDI projects in 2010 (206) was the lowest since 2003 and almost half that in 2006.

While project numbers and jobs created are still some way off highs reached in 2008, which saw 971 projects, the trend over the last decade has shown a consistent, if not dramatic, upward movement. Overall project numbers in 2010 were up 60% over 2003 and the number of jobs created up 30%.

For the survey, E&Y interviewed more than 500 global business leaders in late 2010 to understand their views about the potential of the Indian market.

“A large majority believe that, as early as 2020, India will become a global leader in education, R&D, innovation, and as a producer of high value-added goods and services,” said Memani.

However, to enhance its attractiveness, India will have to focus on expanding infrastructure, make high-quality education available to more people and continue with business-friendly national and state-level policies.

Farokh Balsara, partner and markets leader, Ernst & Young India feels the strong domestic market enabled India to deliver a resilient performance during the global economic slowdown. “It is today emerging as a manufacturing destination, both for the domestic and global markets. As business leaders compete for growth in the new economy, there is a sense of urgency among leading players to seize the prospects offered by the Indian market,” he said.

In terms of potential new long-term trends identifiable in the interim 2010 data, the most significant is the rapid growth of China (and to a lesser degree, the United Arab Emirates —- despite Dubai’s financial problems in 2010) as an investor in India. The 19 projects initiated by Chinese companies in 2010 was dramatically more than the seven implemented in 2009, and represented an increase of 92% compared with the medium-term average. With this, China jumped from being the 16th-largest investor in India in 2009, in terms of projects, to the ninth-largest in 2010.

Software and IT services continue to be the most attractive industry, favoured by 31% of survey respondents. However, sectors such as automotive, consumer products and infrastructure have started drawing significant FDI. “This apart, there has been a sharp rise in investment healthcare (209%), space and defence (180%), plastics (142%), renewable energy (105%) and medical devices (87%), demonstrating the diverse opportunities that India has to present to foreign investors,” said Memani.

In terms of business activity, manufacturing attracts the most FDI projects in India. The country is now also emerging as a hub for manufacturing export, particularly in sectors such as automotive.

This is followed by sales, marketing and support, business services, design, development and design.

The number of FDI projects in the electricity industry showed the highest annual rate of growth, while the number of projects in shared service centers experienced the sharpest decline.