MUMBAI: Ratings agency Moody’s has said that net foreign direct investment (FDI) inflows have hit an all-time high in early 2016, highlighting the success of Narendra Modi’s ‘Make in India’ initiative. The ratings agency said that the FDI inflows have more than financed the current account deficit (CAD) for the first time since 2004. A country is known to be facing a CAD when the value of its imports is more than the value of its exports.
“The rise in FDI points to stronger investor interest in India on the back of robust economic growth. Higher inflows also suggest that recent government policies, such as efforts to liberalize foreign investment limits in several sectors and the ‘Make in India’ initiative, are bearing fruit,” said Moody’s in a report released on Thursday.
Net FDI inflows into India hit an all-time high in January 2016 at $3 billion on a 12-month moving average basis. India’s current account deficit is now more than covered by its FDI inflows. The basic balance (the sum of the current account balance and net FDI) returned to a surplus in 2015 after being in deficit from 2003 to end-2014.
This is good news for the domestic currency whose value has been determined by capital flows due to the country’s permanent trade deficit. The only dark cloud has been the drop in remittances. Money sent by overseas Indians dropped 30% year-on-year in the September-December 2015 quarter due to turmoil in the Middle East economy. But Moody’s said that India’s external financing needs have diminished sharply over the last three years due to a crash in commodity prices, which were expected to remain low.
On FDI, Moody’s said that the development of industrial corridors, investment & manufacturing zones, and ‘smart cities’ will further bolster investment inflows. “In particular, flows into the manufacturing sector are likely to accelerate as the government seeks to boost the sector’s share of gross domestic product (GDP) to 25% by 2022. Government investment in infrastructure and the establishment of a dedicated fund in last year’s Budget to foster private sector participation in infrastructure projects will also help address some of India’s deficiencies in this area and foster FDI,” the report added.
“The strength of inflows reflects India’s relatively strong growth prospects and government efforts to liberalize foreign investment regulation. We expect FDI inflows to continue to rise. Increasing FDI flows provide a stable source of financing that will help to mitigate India’s external financing risks,” the ratings agency said in a statement.The increase in FDI has happened at a time of volatile portfolio (debt and equity) flows.
After a rapid increase in 2014 to early-2015, portfolio inflows fell markedly to around zero. “Debt portfolio flows may increase again, spurred by the Indian government’s lift of the limit on foreign ownership of government bonds, potentially bringing around Rs 27,500 crore into the country. In March, portfolio inflows to emerging markets in general, including India, jumped sharply according to the Institute of International Finance,” said the report, adding that they continue to be volatile.