Economic crisis in the euro zone and uncertain recovery in US are reflected in the foreign direct (FDI) inflows into the country as these declined 27% to $14.78 billion in the first seven months of the current financial year, from $20.29 billion in the corresponding period of 2011-12.
Flows from US nearly halved to $323 million against $650 billion last year.
US accounted for just 2% of the total FDI flows into the country till October this fiscal, against 3% in the corresponding period in the previous fiscal and 7.3% in the first seven months of 2010-11.
US averted the ‘fiscal cliff’ which may have some adverse impact on its economic growth. This may further impact capital inflows. However, quantitative easing of $40 billion a month, which started from September, 2012 may ease capital inflows. The net impact of the two factors are yet to be assessed, analysts said.
US economy grew faster at 2.6% on an annual basis in the quarter ended September 2012 against 1.6% in the corresponding period of last fiscal.
FDI from Germany declined 67% till October this fiscal, from $1.3 billion to $0.48 billion. Contribution of Germany in India’s total FDI dropped to 3% till October 2012 versus 6.7% in the same period last fiscal.
Germany is seen holding up the Euro zone, which is facing a sovereign crisis and risk of a break up.
Germany’s economy expanded just 0.4%, an 11-quarter low in the quarter ended September 2012 on a year-on-year basis. On a sequential basis, its GDP contracted 0.5% in the third quarter of the calendar year.
“Germany is funding the euro zone in times of sovereign crisis. It can hold the euro zone only to a point of time, thereafter its own growth will get affected”, said an economist who tracks euro zone.
The euro zone slipped into recession in the July to September quarter 2012.
FDI from UK was $611 million, a quarter of $2,563 million in April-October 2011-12, an official data showed.
UK comprised about 12.62% of the total inflows till October during 2011-12, which fell to 4.13% in the corresponding period this fiscal.
High capital inflows are required to finance widening current account deficit (CAD) of India.
CAD touched an all time high of 5.4% of the GDP during the quarter ended September 2012. This had resulted in a marginal drawdown of $0.2 billion during the quarter.
Though the government liberalised FDI regime in a retail, power exchange and aviation spaces, its impact on FDI inflows is yet to be seen in a big way.
Unless India eases the doing business in India, India will lose out to its other neighbours and China as the liquidity improves in the developed world, said an analyst.
India stood a poor 132 out of 185 countries in the World Bank’s ease of boing business 2013 report. India's ranking deteriorated in 7 out of 10 parameters in 2013 doing business survey, versus 2012 survey. India lagged behind even struggling neighboring economies like Pakistan, Nepal, Bangladesh and Sri Lanka. Sri Lanka ranked 81 in terms of ease of doing business and takes just 19 days to start a business. Nepal ranked at 108 and Bangladesh ranked 3 notches above India at 129. Pakistan was positioned at 107.
