India is expected to attract $30 billion of foreign direct investment (FDI) this fiscal year, commerce and industry minister Kamal Nath said yesterday. This means that the huge FDI gap between India and China could be closing at last.
Look at it in terms of the size of the two economies. China is likely to get around two-and-a-half times more FDI than India in 2007. But its economy, too, is around two-and-a-half times the size of India’s trillion-dollar economy. So, FDI per unit of GDP will be around the same very soon, even after ignoring the fact that China uses more liberal definitions of FDI.
The expected doubling of FDI this year also shows how the nature of capital flows to India could be changing. Till recently, FDI and FII inflows were on a par. That changed in 2006-07. The $15 billion of FDI that came in was far more than the $4.9 billion of FII investment. Now, FDI could steam way ahead of net FII inflows, thus reducing short-term risks.