The Reserve Bank of India has recently published data on India’s international investment position at the end of September. It’s a snapshot of the country’s external assets and liabilities at a point in time. During the September quarter, the net IIP (international assets less international liabilities) was a negative $97.8 billion compared with a negative $86.1 billion in the June quarter, as capital flowed into the country. Reserve assets, however, exceeded total external debt by a comfortable $38.5 billion.
The interesting trends, however, are seen when one takes a longer term view of the data. Take, for example, the composition of the country’s external liabilities. At the end of March 2003, foreign direct investment (FDI) was only about 20% of the country’s total liabilities. Portfolio investment accounted for 20.77%, while “other investment”, which comprises trade credits, loans, currency and deposits and other liabilities, accounted for as much as 59.22% of total external liabilities. Now consider how those proportions have changed at the end of September. By then, portfolio investment constituted 22.2% of total external liabilities—not much of a change from the 2003 percentage. “Other investment” accounted for 45.5% of external liabilities—a big decline from 2003. This decline has been balanced by a sharp rise in FDI to 32.3% of total external liabilities.
The decline in the mostly debt-oriented “other investment” component of liabilities has been mirrored in the decline of debt liabilities vis-a-vis non-debt liabilities. At the end of March 2003, debt liabilities accounted for a predominant 67.12% of total liabilities. By September 2009, that proportion had fallen to 51.2%. It had fallen even lower to 50.5% in December 2007, but then went up again as a result of the financial crisis. As the economy recovers, the longer term trend is reasserting itself.
On the asset side, the biggest component is obviously reserve assets. The interesting change in trend here has been the steady rise in direct investment abroad, as Indian companies spread their wings in international markets. Direct investment abroad increased from 6% of total external assets of the country at end-March 2003 to 19.6% at the end of September 2009.
On the external liabilities side, the change has been very positive as debt liabilities are replaced by non-debt liabilities, on the one hand, while, among the non-debt component, it is the more stable FDI that is steadily gaining prominence, on the other.
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