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By Tony Munroe and Rajesh Kumar Singh
MUMBAI/NEW DELHI, May 16 (Reuters) - Global companiesbetting on India's potential as a consumer market are lookingbeyond the worst patch in a decade for Asia's third-largesteconomy and investing billions of dollars in the country.
In the biggest recent deal, Unilever isspending up to $5.4 billion to lift its stake in its Indiansubsidiary, Hindustan Unilever, the country's largestconsumer goods maker.
Inbound M&A into India totals $9.86 billion this year, thehighest in Asia, Thomson Reuters data shows, pointing to growingconfidence among overseas firms in the potential of a 1.2billion-strong consumer market.
"India as a country is under-consumed. That is changing,"said Amitabh Mall, a partner at the Boston Consulting Group.
For now, however, an economy in the doldrums is poised foronly sluggish recovery. While long-crippling inflation isfinally easing, a general election due next year and fractiousparliamentary politics have stalled many economic reforms.
In 2012, foreign direct investment into India dipped about 7percent to $29.3 billion. By comparison, FDI into China saw adecline of about 10 percent, but it attracted $111.6 billion.
Overall capital investment in India is likely to have risenjust 2.5 percent in the last April-March fiscal year, down from14 percent two years earlier, and there is little of thedesperately-needed investment in infrastructure, which wouldease inflationary bottlenecks and also stimulate growth.
In the consumer sector, despite the long-term attractivenessof India, demand remains weak.
P. Balendran, vice president of General Motors Co India, expects industry-wide car sales in India to fall 2 or 3percent in the fiscal year that started in April, slightlybetter than the 7 percent drop in the most recent year but a farcry from the 30 percent growth of three years ago.
"The market is absolutely sluggish. We don't expect sales topick up any time before the festive season," he said, referringto the holidays that begin around October.
A slow economy and high inflation have crimped spending notjust on big-ticket goods like cars but also discretionary items.Jubilant Foodworks, the franchise owner for Domino'sPizza and Dunkin' Donuts, said same-store sales in the Marchquarter grew 7.7 percent, down from 26.3 percent a year earlier.
GREEN SHOOTS?
On the bright side, the Indian economy has bottomed,although the central bank's expectation that it will grow 5.7percent this fiscal year, up from 5 percent the previous year,is a grim outlook for a country that aspires to double-digits.
Bankers and fund managers say private equity investment inIndian infrastructure could pick up, leading to better prospectsfor growth.
Since taking office last July, Finance Minister P.Chidambaram has championed reforms and hit the road to wooinvestors in Asia, Europe and North America.
"There's a perception that the government is no longer indenial as far as the economic reality of India is concerned andis trying to take some steps to correct that," said Sonal Varma,an economist at Nomura in Mumbai.
Despite the slump, consumer spending in India is on track torise from nearly $1 trillion in 2010 to $3.6 trillion in 2020,or annual growth of 14 percent, said Mall at Boston Consulting,faster than the global average of 5.5 percent and the 9 percentaverage expected for emerging economies over the same period.
Overseas companies are especially ardent thanks to cheapcapital, whereas Indian companies are held back by high domesticinterest rates. Also, for global companies, India offers bettergrowth prospects than they have at home.
Meanwhile, some of Chidambaram's efforts are bearing fruit.
Recent investment plans like Malaysia-listed AirAsia's formation of an Indian airline with the Tata group andSwedish furniture giant IKEA's $2 billion storeroll-out projected over 15 to 20 years are the direct result ofreforms made last year in the aviation and retail industries.
Gulf state Qatar recently bought a 5 percent stake in BhartiAirtel Ltd for $1.26 billion despite 13 straightquarters of falling profits for India's biggest telecomscarrier, as subscriber growth and usage trends suggest the worstmay be over for one of India's most beaten-down industries.
Among other recent deals, Abu Dhabi-based Etihad Airwayslast month invested $379 million in India's Jet Airways, while Goldman Sachs agreed to invest $110million in cable TV operator Den Networks Ltd.
MORE TO BE DONE
Still, India's signature reform of 2012, allowing in foreignsupermarket chains such as Wal-Mart Stores Inc, has yetto find takers. Operators are seeking clarification on sourcingand infrastructure rules, and none has applied to enter.
Further reforms, such as a push to increase the limits onforeign ownership in insurance and a land reform bill, stalledwhen the latest parliamentary session ended early amid noisypolitical acrimony.
A national election due by May 2014 means the window forChidambaram to enact more of his agenda is narrowing.
A key deterrent to more investment is often-unpredictabletax treatment of foreign companies in India.
A year ago, corporate investors were horrified by India'sefforts to impose a $2 billion-plus retrospective tax onVodafone even after the highest court ruled in favour ofthe mobile carrier. While Chidambaram has said he wants thematter resolved, the dispute drags on.
