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FDI surge reflects economic strength

FDI surge reflects economic strength
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First Published: Sat, Jun 30 2007. 12 13 AM IST

Updated: Sat, Jun 30 2007. 12 13 AM IST
A huge surge in foreign direct investment (FDI) by 153% to $19.5 billion (Rs79,950 crore) in the year ended March emphatically underscored the strength of the country’s economic health though some experts cautioned that the performance masks key structural issues.
The balance of payments (BoP) data, released by the Reserve Bank of India (RBI) on Friday, also reflected the growing global Indian footprint, with outgoing FDI rising 279% to $11 billion, leaving the net FDI at $8.4 billion.
“This is a huge jump in the space of one year, in both inbound and outbound flows. Although this was expected, the more interesting question is where has this gone? The RBI should have told us about it,” says Saumitra Chaudhuri, economic advisor, Icra Ltd.
The data also showed that companies raised $16 billion in external commercial borrowings, almost five times of the $2.7 billion borrowed in 2005-06.
However, portfolio flows were much lower at $7.5 billion, compared with $12.5 billion in 2005-06, a figure that’s disputed by Chaudhuri, who quotes market regulator Securities and Exchange Board of India’s figures to point out?that the inflows should have been more than $10 billion.
The surplus on the capital account of BoP rose to a record $46.2 billion, almost double of what was recorded in 2005-06.
The sustained rise in the capital inflows has been reflected in the rise of the exchange rate of the rupee, which touched Rs40.75 to a dollar on Friday, compared with Rs43.50 on 30 March.
Surging software exports and steady inward remittances, which define the bulk of so-called “invisibles”, offset the widening trade deficit, resulting in a current account deficit (CAD) of 1.1% of gross domestic product, marginally lower than 1.3% in 2005-06.
India is now the only country in Asia, other than Indonesia, to have a CAD.
CAD, which is an aggregation of net invisibles and the trade deficit, represents the demand and supply of goods and services in the economy and hence, reflects the domestic fundamentals of growth and employment.
The last quarter of January-March showed up a surplus of $2.56 billion on the current account as invisibles more than offset the trade deficit.
For the full year, however, CAD aggregated $9.61 billion, compared with $9.19 billion in the preceding year.
Ajay Shah, a fellow at the National Institute of Public Finance and Policy and a former finance ministry consultant, says that the March quarter surplus happened because RBI bought $12 billion.
“I’d be very comfortable with a 3% (of gross domestic product, or GDP) current account deficit,” he adds. “Two decades ago, India was a basket case, so we were scared to let the CAD travel beyond 1%. Now the entire world is ready to do India, a CAD surplus at this stage and a portfolio flow of less than $10 billion is bad news to me.”
Shah says India should allow a CAD that can be easily sustained by its abundant capital flows.
Indeed, this may already be happening. A measure used by the central bank nets out private remittances by workers, because they believe that it is not triggered by any changes in the domestic economy, and then aggregates CAD.
This adjusted CAD works out to 4.1% of GDP, reflecting a very high demand in the economy financed through external savings.
To some this is a matter of concern, especially with export growth showing some deceleration in recent months.
Some “50% of the emerging market portfolio flows are to India”, says Haseeb Drabu, chairman and chief executive of Jammu and Kashmir Bank. “That is a huge number. That along with a current account deficit shows that you are not as strong as you think you are. Any reversal would make monetary management difficult,” he adds.
Net invisibles earnings rose to $17.80 billion in the March quarter, up from $14.09 billion a quarter earlier, while for the full year, the figure came to $55.3 billion, recording a 30% increase over $42.6 billion in 2005-06.
In terms of the outlook for this year, “I don’t expect imports to slow down sharply, only moderate, but the rupee appreciation will impact economic activity and worsenthe current account,” says Dharmakirti Joshi, director and principal economist of Crisil Ltd.
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First Published: Sat, Jun 30 2007. 12 13 AM IST
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