FDI flows remain a priority: DBS Research Report

Recent observations by FT's consultancy group that FDI flows into India during Jan-Jun15 surpassed those to US and China piqued much interest. The group's data is however at odds with official numbers. In contrast to the financial daily's numbers, RBI data on total FDI into India is more modest at USD 20.5bn up 15% YoY in first six months of the year. On net basis, inflows stood at USD 18.3bn. China's Ministry of Commerce, on the other hand, puts newly approved FDI in China at USD 68bn in the same period, three times that of India. The disconnect between the FT group and official data appears to lie in former's reference to greenfield investments (measured by estimated capex) rather than realised flows.

Increasing FDI inflows nonetheless remains a priority for the Indian government, which got a shot in the arm as the economy moved up 16 places to rank as the 55th most competitive economies (amongst 144) in this year's World Economic Forum report. India also entered the top ten destinations for FDI in 2014 according to the UNCTAD, up from 15th position earlier.

This comes on the back of net FDI inflows jump to a record USD 32.6bn (1.7% of GDP) in FY14/15 from USD 22bn (1.1% of GDP) year before. Mauritius, Singapore, UK and Japan are the top four investors this year, with bulk of the interests concentrated in the services, technology, real estate and telecom sectors. Attempts to forge stronger ties with strategic global partners have also provided an 'open for business' image. After PM Modi's recently concluded visit to the US, German Chancellor Angela Merkel is in India until Tuesday. Follow-up discussions under the Inter- Governmental consultations (IGC) is likely after the first round was held during PM Modi's visit to Germany back in Apr15. It also remains to be seen if the government prefers to focus on bilateral relations with key European economies, given that the EU-India FTA discussions have been in a logjam since before 2010.

Despite better FDI numbers, India lags some of its regional peers. Concerted effort has been taken to boost inflows, with ceilings in some key sectors raised since last year, focus on improving ease of doing business and addressing infrastructure gaps. The Make in India initiative is expected to generate fresh inflows across various sector verticals, from defence to manufacturing, R&D, automobiles and services.

Overall, stronger FDI inflows are crucial for India as they provide a more stable form of financing the current account shortfall rather than the debt-creating portfolio flows. The recent narrowing in the current account deficit and improvement in the basic balance of payments (current account deficit plus net FDI) are expected to keep India's reliance on foreign funding in check.

Source : Equity Bulls

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