Spotlight on FDI – Slowdown key to monitor given rising CAD and a risk on/off environment :: Citi

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Spotlight on FDI – Slowdown key to monitor given rising CAD
and a risk on/off environment
FDI flows down 35% during April-August — In sharp contrast to portfolio
inflows which are up 37.2% (US$18.8bn) in the current fiscal v/s US$13.7bn
in the same period last year, trends in foreign direct investment (FDI) are down
35%, with cumulative flows during April-August at US$8.9bn vs. US$13.7bn
during the same period last year. The slowdown in FDI is likely on the back of:
(1) the still-fragile global economic recovery, (2) investor concern on the recent
delays in projects due to land acquisition/environmental issues, and (3) slow
progress on the regulatory front, particularly in retail and insurance.
Sectoral Trends – Deceleration Due to Real Estate and Housing — Current
trends are disappointing, given that India was recently ranked the 9th most
attractive FDI destination (up from 13th position last year) by the UNCTAD
‘World Investment Report 2010’. On a sectoral basis, the decline is mainly
attributed to a sharp deceleration in real estate and housing (see page 2 for
details). Interestingly, the sectors which attracted the highest FDI flows during
April-July FY11 include services (14.2% of total flows), telecom (13.6%), and
power (8.9%).
Implications for BoP: Capital Flows Sufficient But Composition Deteriorating —
In the recent past, FDI has been financing close to 40%-45% of India’s Current
Account Deficit (CAD). In FY11, we expect the CAD to widen to US$49bn or
3.1% of GDP v/s US$38bn or 2.9% in FY10. Moreover, the recent rally in
commodities poses upside risks to our CAD estimates (our current estimates
incorporate Indian crude at US$78/bbl. Every US$1/bbl increase in oil prices
raises India’s deficit by US$700mn). While we reiterate our view of more than
sufficient capital flows to fund the deficit, the slowdown in FDI in an
environment which has been oscillating between risk on-off needs watched.
But There Is Hope — As we have mentioned earlier, regulatory measures are
key to sustained FDI flows. Over recent months, the government has released a
host of discussion papers on FDI, including multi-brand retailing, defense, the
issue of limited liability partnerships, and foreign/technical collaborations in
the event of existing tie-ups. These are a step in the right direction, but
implementation is imperative.