Current a/c deficit a worry, need to arrest fall in FDI

Flagging widening current account deficit as a major risk, the Reserve Bank of India (RBI) on Monday said the government should speed up decision-making and improve business climate to arrest the continuing decline in net foreign direct investment (FDI).

Higher current account deficit and portfolio flows were the highlights of the country’s external sector in the second quarter of 2010-11. These might pose a concern in the future too, said RBI.

Higher trade deficit and less support from net invisibles led to a higher current account deficit. Even though export growth remained reasonably strong, robust import demand resulting from high domestic growth led to a large expansion in the size of the trade deficit, said RBI.
 

OFF-BALANCE CAPITAL FLOWS IN 2010-11 SO FAR ($ BN)
Component	Period	2009-10	2010-11
FDI into India	April-November	25.3	19.0
FIIs (net)	April-January 14	24.7	31.6
ADRs/GDRs	April-December	3.2	1.8
ECB approvals	April-December	13.1	16.0
NRI deposits (net)	April-December	3.5	2.3

Higher net capital flows were absorbed by the widening current account deficit, leading to a moderate rise in reserves. External liabilities, however, increased at a faster pace than external assets. The composition of capital flows also changed considerably, with a large increase in portfolio flows and a fall in FDI. India’s export growth remained strong in the third quarter despite persisting positive inflation differential.

RBI argued the decline in the net FDI was making the task of managing external sector tough. The moderation in FDI inflows into India during April-November 2010 was driven by sectors such as construction, mining and business services, it said.

A major reason for the decline in FDI is reported to have been the environment-sensitive policies pursued for the mining sector, integrated township projects and ports. This appears to have affected investor sentiment, RBI said.

Then there are persistent procedural delays, land acquisition issues and lack of quality infrastructure, which remain at the centre of the government’s policy focus, according to RBI.

Expeditious resolution of concerns could raise the share of India in the projected FDI inflows into emerging market economies in the near future, said RBI.