Home >Market >Mark-to-market >Foreign direct investment to India slows

Foreign direct investment (FDI) to India has slowed to $27 billion in 2012 after touching $32 billion in 2011, according to data from the finance ministry. Foreign direct investment declined to $2.5 billion in the December quarter from $5 billion during the same period last year.

The moderation in net FDI inflows leaves India at the mercy of highly volatile capital inflows, which can leave the country any time. Foreign institutional investor inflows during 2012 were $25 billion compared to a marginal outflow in the previous year. A. Prasanna, chief economist, ICICI Securities Primary Dealership, explained the ideal relationship between the more stable foreign direct investment and the volatile sources of funds such as portfolio inflows and external commercial borrowings. “Assuming India has a trade gap of $60 billion, at least $30-35 billion should be funded by foreign direct investment to bridge the deficit," Prasanna said.

While the policy of quantitative easing adopted by central banks in the developed countries has led to liquidity flooding the markets in the shape of FII inflows, foreign direct investors have been deterred by the poor investment climate in India and vexing tax issues. India seems to be losing out against other emerging markets such as China, which has attracted FDI flows of $111.62 billion in 2012. Analysts say the reason is because of an unfortunate mix of sluggish economic growth and hurdles in getting approvals.

There have been encouraging signals from the government: the decisions to allow foreign investment in retail trade and in aviation are examples. But it will have to do more in simplifying procedures, clearing hurdles and removing bottlenecks before the country can overcome its lopsided dependence on portfolio inflows.

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