India to Rely on FDI to Bridge Current Account Deficit

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Aug. 26 – The Indian government will be reliant on the inflow of cash generated from foreign direct investment (FDI) to help fund its current account deficit (CAD). In the first quarter of this year India saw a 70 percent increase in FDI, and will now be relying on further big-ticket deals and acquisitions to help rein in its CAD.

“We expect US$5-6 billion (about Rs 32,000-38,000 crore) foreign direct investments in the current quarter from some of the big ticket deals,” said a senior finance ministry official.

In the first quarter of this year India received over US$9 billion in FDI, representing a 70 percent increase during the same period in the previous year. The government is counting on further capital inflows to help bridge the US$70 billion CAD it expects this year.

There are numerous big-ticket deals in the final stages of completion that will provide a massive inflow of capital for India. These include Etihad Airways’ acquisition of a stake in Jet Airways and Mylan Inc.’s acquisition of Agila Specialties. Furthermore, the retail giant Ikea is expected to bring its proposed investment of Rs 10,000 crore into the country soon.

With the rupee dropping 16 percent against the U.S. dollar since May, there are concerns that India will have to spend its reserve currency to be able to fund its CAD. However, with the rupee at a record low level, it has been stated that it is subsequently now a boom time for foreign investors. Further stake acquisitions are attractive for multinational corporations who are able to purchase shares at decreased prices, further boosting FDI flows into the country.

Furthermore, India’s Foreign Investment Promotion Board (FIPB) will tomorrow consider the approval of 32 investment proposals, including six proposals in the pharmaceutical sector. Among the companies making their foreign investment proposal are giants such as Boeing Cyprus Holdings Ltd., HBO India Pvt. Ltd., Hindustan Coca-Cola Holdings Pvt. Ltd. and Eurocopter India Pvt. Ltd.

Thus, as the CAD widens and the rupee continues its downward slide, India will be placing great importance on FDI.

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