FE Editorial : Where’s the FDI?

Going by reports put out by broking houses, finance minister P Chidambaram appears to have had fairly successful roadshows in both Singapore and Hong Kong. Indeed, the FII inflows data put out by RBI confirms this—from a mere $443 million in April-November FY12, FII inflows jumped to $11.2 billion in April-November FY13 (in January, which still has some more days to end, FII inflows were $3.2 billion, or double what they in the same month last year). The problem, however, is that FDI flows have fallen dramatically over a period of time. So, while a little over 100% of India's current account deficit (CAD) was financed by FDI inflows in FY08, this is now down to around a fourth. Net FDI flows for the April-November FY13 period, RBI data shows, fell to $14.7 billion from $19.6 billion in April-November FY12—for some reason, industry ministry data shows a 44% fall for the same period. In other words, while the rising CAD—from 3.8% of GDP in Q1FY12 to 5.4% in Q2FY13—is a problem, financing it has become even more of a problem. With the FDI share falling, the balance has been made up by volatile FII flows and trade credit—ECB flows have also risen considerably. While short-term debt has risen from 16.2% of total debt in FY07 to 22.5% in FY12, the share of volatile capital flows to reserves has risen, RBI's Financial Stability Report points out, from 67.3% at the end of March 2011 to 81.3% at the end of June 2012. In other words, the financing of the CAD means India is very vulnerable to a change in investor perceptions and global disturbances. Trade credit, largely from European banks, fell during the peak of the Europe crisis.

Equally worrying is the rise in corporate exposure to ECBs which was around $104 billion at the end of FY12 as compared to $41 billion at the end of FY07. In the case of companies like Mahindra & Mahindra, a Kotak Institutional Equities report points out, foreign debt as a proportion of total debt rose from 25% in FY09 to 49% in FY12. For the cash-strapped Bharat Petroleum, this rose from 18% to 88%, from 15% to 68% for Hindustan Petroleum and from 22% to 42% for Indian Oil. Apart from being a serious problem for companies, like the oil PSUs, that don't have dollar earnings since the positions are often unhedged, this also poses a macro risk. Till the end of FY14, around $20-25 billion of ECB and FCCBs need refinancing. The outcome of the finance minister's next leg of roadshows, to meet FDI investors in the UK and Germany for instance, will be critical as far as financing of the CAD is concerned.

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