FDI Alone has fully funded India’s Current Account Deficit

By Mani
Updated on

India’s foreign direct investment (FDI) will remain at last year’s elevated levels, though the FDI inflows momentum may wither and the incremental gains over the next few quarters may not be limitless, according to HSBC. Pranjul Bhandari and Dhiraj Nim underscored in their May 3 research note titled “India’s external sector bounty” that India’s overall FDI will be sufficient to fund its current account deficit.

India’s FDI inflows doubled in 3 years

Highlighting the robust FDI inflows India has been witnessing during the past three years, the HSBC analysts point out that India’s FDI inflows doubled from US$22 billion to US$46 billion between 2013 and 2016. As the strong inflows were also coupled with a drop in FDI outflows, India’s economy witnessed commendable net FDI gains.

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Taking a deep dive into India’s FDI flows during the past three years, Bhandari and Nim point out that the incremental FDI has flown into digital, physical and other services such as banking, commodity exchange and insurance. Though the digital economy garnered much of the incremental FDI during 2014 and 2015, the analysts point out that the appetite for this segment waned, with physical economy-linked FDI witnessing a smart increase.

The HSBC analysts believe that India’s FDI inflows will remain robust in the future, though the incremental flow may not be as rapid as in the past. However, thanks to the series of measures initiated by the government in the recent past, the analysts believe that over the longer term, FDI inflows are likely to be strong on the back of enhanced macro stability, easier regulations and a sustained increase in FDI limits. For instance, in June 2016, the government enhanced the FDI ceiling to 100% for defensive sectors.

India’s exports rose sharply over the last two months

Bhandari and Nim point out that high- and medium-technology exports aided India’s exports in rising sharply in February and March. The analysts point out that the rupee (INR) contributed 20% of India’s export growth, while world growth accounted for a third of it. The HSBC analysts highlight that domestic bottlenecks explain the remaining 50%. The analysts believe that of the three drivers, world growth alone can be singled out for the recent export upsurge.

India's export fdi inflows fdi inflows

However, the HSBC analysts caution that domestic bottlenecks remain a constraint that could limit India’s export growth. For instance, non-availability of cotton for textile exports or irrigation facilities for agriculture could dampen India’s exports.

Striking a positive tone, the HSBC analysts believe that thanks to export-enhancing FDI, India’s exports will grow in the future. However, they believe that with both higher FDI inflows and a strong rupee, incremental gains over the next few quarters may come with limits.

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