2011-2012’s Sharp Rise in FDI and a Forecast for the Near Future

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May 25 – Despite the Indian government’s somewhat closed FDI policies, the 2011-2012 financial year brought in US$46.84 billion in FDI – a sharp 34.4 percent increase from the US$34.84 billion seen in 2010-2011. However, this financial year looks less promising as there has been more negative news and less capital to go around.

“The rise in FDI equity inflows in the previous financial year, compared to the one earlier, was because of some big-ticket deals, especially in the chemical and oil & gas segments. Besides, strategic and financial investors continue to evaluate and explore opportunities in both greenfield and brownfield sectors,” Akash Gupta, executive director of regulatory services at PricewaterhouseCoopers, told the Business Standard.

“Due to limited availability of long-term capital, interest rates have peaked and inflation remains at an all-time high. Under such circumstances, attracting foreign investment for any country remains a challenge. Investors would not want to commit large capital investments. They would, instead, tend to park these in asset classes with low-risk sectors,” Gupta added.

“It is true FDI inflows have seen a tremendous rise in the last financial year. This is one indicator that still supports the argument that the macro fundamentals in India are strong, despite a so-called ‘policy paralysis.’ In other words, India’s long-term outlook is strong, though in the short term, there is some erosion of confidence, which is visible in the outflow of short-term foreign capital. The first half of 2011-12 was much better compared to the second, when all the negative factors had smoothened FDI inflows to some extent,” commented N R Bhanumurthy, an economist at the National Institute of Public Finance.

“Going forward, India may not attract as much FDI as that in FY11-12 because of the worsening crisis in the euro zone, the subdued investor sentiment and the decision to relook at Mauritius as the biggest source of FDI. Besides, recent decisions on tax laws in the Budget would hamper investor sentiment in the short term,” he said.

Ved Jain, chairman of the Associated Chambers of Commerce and Industry’s national council on direct taxes, says that the 56 percent of foreign investment into India originating from the tax havens of Mauritius, Singapore and Cyprus will likely be severely hit.

Despite FDI growth in almost every sector during FY11-12, the government’s intention to attract foreign institutional investors as a way to halt the rupees’ depreciation, combined with weaker capital inflows, all point to a short-term stagnation in FDI.

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