• JUNE 16, 2006

The IMF's take on India....

... in terms of incremental investments and economic growth, in the World Economic Outlook (May 2006), comes as an eye-opener. The report provides the Indian investor a transparent view of the global investor's perspective on the Indian markets. Particularly, it gives a perspective on the flow of FDI into the country, which is not only an important barometer of economic growth but is also a yardstick for measuring the foreign investor's confidence in the country's long-term prospects.

Investments so far...
India's share in global FDI flows improved to 0.7% in 2005 from close to zero in 1991 when the government initiated liberalisation in FDI-related regulations. Its ranking in terms of the value of gross FDI inflows has also steadily improved to 21st in 2005 from 48th in 1992. However, the FDI inflow into India (at 0.9% of GDP in 2005) stands grossly below the average for developing countries (4% of GDP). India's inflow at US$ 6.6 bn in 2005 was significantly lower than that for other major emerging markets like China (at US$ 60.3 bn), Mexico (US$ 17.8 bn), Brazil (US$ 15 bn) and Russia (US$ 14.6 bn).

Composition of capital inflows...
(2003 - 2005)Emerging markets*India
(US$ bn)(excl. India) 
Total capital inflows36665
Total net FDI inflows25011
% share of FDI inflows68.3%16.9%
% share of non-FDI inflows31.7%83.1%
* Top 10 emerging markets  
Vs other emerging markets...
Capital flows into India have risen sharply between 2003 to 2005 at US$ 65 bn compared to US$ 30 bn in the preceding three years. However, the net FDI flows totaled only about US$ 11 bn in this period (17% of total capital inflows). Most of the improvement in total capital inflows has been due to higher non-FDI flows. Cumulatively, for the past three years non-FDI flows accounted for about 83% of total capital flows in India compared with 32% for the top emerging markets. One of the most important non-FDI sources for India has been FII (foreign institutional investment). Of the total capital flows of US$ 65 bn received over the past three years, US$ 29 bn were in the form of Foreign Institutional Investors (FIIs) inflows (45% of the total capital flows into India). Also, India has been one of the most favored markets over the past three years, representing an estimated 25% of total FII inflows into developing markets.

The FDI flows hereon will depend on the efficient utilisation of the available resources and the government's commitment to facilitate the same. This means that the thrust needs to be on infrastructure development, which can enhance the economic growth prospects, thereby providing attractive return on the FDIs. The government's attitude toward infrastructure outlay is changing, with spending in this area finally beginning to rise. India's infrastructure spending is estimated to increase to 4.9% of GDP (US$ 50 bn) in F2009 from 3.6% (US$ 28 bn) in FY06. However, this is only a modest rise compared with India's needs and considering the steady decline prior to FY02. This spending also pales when compared with China's outlays on infrastructure - 9% of GDP (US$ 201 bn) in FY06. With the government debt to GDP at 82% in FY06, the IMF believes that large divestments of the government's stake in public sector undertakings (PSUs) will be needed to mobilise resources to kick-start substantial growth in infrastructure spending. This would form a much-needed resource supply, generating more productive job opportunities for the growing work force and increasing the savings rate. In this way, India could be moved onto a higher sustained virtuous growth cycle.

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