In a first since 1991, FDI flow takes care of CAD
MUMBAI: For the first time since the opening up of the economy in 1991, India’s current account deficit - the excess of imports over exports - is being funded by foreign direct investment (FDI), a sign of rising confidence among long-term investors in Prime Minister Narendra Modi’s ability to strengthen the country’s economic foundation for sustained growth.
The deficit funding, which had historically been done through borrowings by companies in the overseas markets or remittances by non-resident Indians and portfolio inflows, is undergoing a shift. FDI, where the investment is typically towards establishing operations or acquiring business assets, is more stable: it stays in a country for years unlike the often-fickle portfolio inflows into the securities market.
In fact, the record surge in FDI inflows is being used by companies and the central bank to redeem past borrowings. Data from the RBI show that these categories witnessed net outflows in the April-January period. These include a near $26 billion outflow due to redemption of special dollar deposits India raised from NRIs in 2013 to prop up a free-falling rupee at the time.
Gross FDI from April 2016 to January 2017, the first 10 months of the fiscal year that just ended, had totalled $53.3 billion, compared with $47.2 billion in the same period a year earlier and $55.6 billion in the entire fiscal 2016.
“In times of volatile global market conditions, such durable flows preserve the resilience of external sector account,” said Shubhada Rao, the chief economist at Yes Bank. “An outcome of liberal policy framework as well as an endorsement for India’s rapidly improving business environment, FDI inflows in recent times have outpaced portfolio flows. FDI, in addition to being durable, also facilitates transfer of superior technology that brings efficiency gains.” India is becoming an economy that offers stable growth in an environment where emerging markets like South Korea and Indonesia have been struggling with political and economic problems. India’s ranking in global ease of doing business has risen to 130 in 2017 from 142 in 2015.
The government has been aggressive in pushing legislation such as on Goods and Services Tax, which is all set to become a reality more than a decade after the most important tax reform to create a single market was first thought about.
The deficit funding, which had historically been done through borrowings by companies in the overseas markets or remittances by non-resident Indians and portfolio inflows, is undergoing a shift. FDI, where the investment is typically towards establishing operations or acquiring business assets, is more stable: it stays in a country for years unlike the often-fickle portfolio inflows into the securities market.
In fact, the record surge in FDI inflows is being used by companies and the central bank to redeem past borrowings. Data from the RBI show that these categories witnessed net outflows in the April-January period. These include a near $26 billion outflow due to redemption of special dollar deposits India raised from NRIs in 2013 to prop up a free-falling rupee at the time.
Gross FDI from April 2016 to January 2017, the first 10 months of the fiscal year that just ended, had totalled $53.3 billion, compared with $47.2 billion in the same period a year earlier and $55.6 billion in the entire fiscal 2016.
“In times of volatile global market conditions, such durable flows preserve the resilience of external sector account,” said Shubhada Rao, the chief economist at Yes Bank. “An outcome of liberal policy framework as well as an endorsement for India’s rapidly improving business environment, FDI inflows in recent times have outpaced portfolio flows. FDI, in addition to being durable, also facilitates transfer of superior technology that brings efficiency gains.” India is becoming an economy that offers stable growth in an environment where emerging markets like South Korea and Indonesia have been struggling with political and economic problems. India’s ranking in global ease of doing business has risen to 130 in 2017 from 142 in 2015.
The government has been aggressive in pushing legislation such as on Goods and Services Tax, which is all set to become a reality more than a decade after the most important tax reform to create a single market was first thought about.
