FIIs have influenced the flow of money into India for quite some time now. But this became more pronounced in the pre-crisis and crisis years. During that period, not only were the FIIs responsible for fuelling the rally in the Indian stock markets, but were also the reason why the markets plunged when the global financial crisis deepened.
The prospect of the strong India growth story has lured these investors to foreign shores. But while capital coming into India is welcome, the duration of the same is the key. In that respect, money being poured by FIIs has largely been branded as 'hot money' since they could be pulled out in droves at the slightest hint of a crisis.
This is in sharp contrast to FDI (foreign direct investment) which is more long term in nature and is seriously needed if India is to move to the next level of growth and sustain the same. The numbers for FY11 so far have not been so encouraging on that front. While FDI has slowed down a tad bit, FII money has increased. So much so that the gap between the two has considerably widened this fiscal. For instance, as per a leading business daily, while, FIIs invested US$ 31 bn during April to January of 2010-11, India received FDI of US$ 17.1 bn during the same period. One of the reasons for FDI to slowdown has been the debt crisis in Europe and the US.
Indeed, while India's trade balance has been in the negative, what has cushioned the impact on the current account balance are capital inflows. Considering the volatile nature of the same, what India needs to focus more on is FDI. The latter will especially help ramp up the country's crumbling infrastructure, which has been a major deterrent to growth. Not just that, with the government's hands tied behind its back on account of strained finances, it has not been able to invest much in critical areas such as education and healthcare as well. Thus, more FDI will go a long way in easing the pressure on te government and ensuring the economic well being of India in the long term.