Widening gap between FDI, FII inflows causing concern

With slowdown in the foreign direct investment (FDI) by 25%, India's dependence on foreign institutional investors (FII) inflows, considered as hot money for maintaining its current account, has increased this fiscal.

Moreover, the gap between the FDI and the inflows from FIIs mainly in the stock market, has grown to $14 billion in 2010-11, according to the latest official data.

While, FIIs invested $31.03 billion during April-January 2010-11, India received FDI of $17.08 billion during the same period, showing a gap of about 45% between the two.

In 2009-10, the difference between FII and FDI was only $1.9 billion.

However, in the previous years of 2007-08 and 2008-09, FDI inflows were way ahead of the money coming through the share market.

Although the country's current account deficit (CAD) has been kept under check due to large capital flows coming through the FII route, but the quality of the inflow remains an issue.

In its mid-quarterly policy review, the RBI had estimated the CAD for 2010-11 at around 2.5% of the country's Gross Domestic Product (GDP).

"It is necessary to focus on the quality of capital inflows with greater emphasis on attracting long-term components, including FDI, so as to enhance the sustainability of the balance of payments (BoP) over the medium-term," the RBI had said while expressing concerns on the decline in FDI.

The drop in FDI inflows to $17.08 billion during the ten months of the current fiscal from $22.96 in the corresponding period (April-January) of the previous financial year is attributed to the financial troubles in several European economies.

Germany, France, the Netherlands and UK are the main investors in India.