In an interesting article, Professor Jayanth R Varma of IIM mentioned about how certain developments in India were leading to a possible beginning of capital flight from the country. Capital flight occurs when capital or assets are moved out of a country due to certain reasons varying from economic consequences or political instability. It is also due to higher return on investments offered outside the county.
Professor Varma mentioned three key developments as proof of the same happening in India. These include the craze for gold, which is imported and as such an indirect form of capital flight. He discussed the possibility that some of the current account deficit could be disguised as capital flight by under invoicing exports and over invoicing imports. He believes so as it is difficult to put the blame solely on lower demand from developed regions. This too at a time when other Asian regions are posting large trade surpluses in a similar environment and also when Indian exports have become quite competitive on account of the rupee depreciation!The third key phenomenon is that of companies increasingly looking at investing in projects abroad. This is leading to more cash being deployed in foreign markets. This is an obvious form of capital flight. And why has this been happening? The answer is the difficult business environment in India. A handful of companies have expressed their intentions of looking abroad for business opportunities. A very recent example is of Tata Power's management considering investing abroad citing reasons such as delayed regulatory approvals and the fuel supply challenges.
The government has been trying to lure in investments from abroad in the form of foreign direct investments - by providing incentives to companies and investors - we believe similar actions need to be taken towards the Indian firms as well. While the government seems to have taken some steps towards incentivising very large scale investments in the Union Budget 2013, one can only gauge the outcome of the same over the medium term.