Long-Run Foreign Investors: Are They Easy Nuts to Crack?
Mainstream, Vol. LI, No. 22, May 18, 2013
2 Pages Posted: 19 Jul 2013
Date Written: July 18, 2013
Recently the Finance Minister was on a tour to Europe to lure the foreign investors to invest in India. Some years back, India was among the preferred destinations for the foreign investors. However, that is no more the case. If one attempts to verify it through figures, foreign direct investment (FDI) has been at an all-time low during the last two years. India’s current account deficit (CAD) is at an all-time high as a proportion of the GDP, and this is being met mainly through portfolio investment. The composition of our reserves, which a few years ago was a reason for comfort, is also skewed in favour of short-term debts and portfolio investment. The persistence of these factors is bound to keep the speculation-mongers active about the imminent depreciation of the rupee, which is also assisted by continually higher headline inflation rate prevailing in India vis-à-vis other trading partners.
All these factors reinforce the urgency for the foreign investors (long-run) to invest in India, though the gap between the investment needs and savings to achieve eight-plus growth rate is another reason to invite them. In this context, three issues need to be analysed – one, why foreign investors turned India into an unfavoured destination for investment in the first place, two, what India should do to win back the lost confidence of the foreign investors, and finally, how far India would be able to meet these requirements given the present circumstances.
Keywords: Current Account Deficit (CAD), Portfolio Investment, FDI
JEL Classification: C22, E02, E50
Suggested Citation: Suggested Citation