Indian Government to Revisit FDI Caps

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Jun. 19 – India’s Ministry of Finance has revealed that the government is looking to reevaluate foreign direct investment (FDI) caps due to its mounting current account deficit (CAD). The large CAD is due in part to India’s reliance on oil, coal and gold imports.

According to a press release, Union Finance Minister Shri P. Chidambaram stated that “the government is looking at FDI caps to see if they are indeed serving the purpose.” If not, the “caps could be revisited.”

Chidambaram made his remarks during a meeting of the Parliamentary Consultative Committee of the Ministry of Finance on Monday. He affirmed that the extent of the CAD and its financing was central to the meeting’s agenda.

India currently allows 100 percent FDI in many sectors, yet places caps on sensitive industries such as multi-brand retail, insurance and defense. India, however, is feeling pressure to raise such caps on FDI in order to help finance its growing CAD.

India’s CAD reached a high of 6.7 percent in the December 2012 quarter. According to the Reserve Bank of India, the country can only sustain a CAD in the range of 2.5 percent. Even so, the CAD is likely to be around 5 percent in 2012-13.

Despite uncertainty in the global market, Chidambaram still considers India a desirable FDI location and as a prime destination for foreign institutional investors. He mentioned the government was able to finance the CAD for 2012-13, while also adding US$3 billion in reserves.

On Tuesday this week, Chidambaram also announced India’s maiden Infrastructure Debt Fund (IDF) scheme of the IIFCL Mutual Fund. The fund is designed to mobilize resources from insurance and pension sectors for long-term investments.

He said that in order to push investment into the infrastructure sector, and to attain a GDP growth rate of 8 percent, there is demand for financial products such as IDFs, takeout finance and credit enhancement.

Chidambaram remains confident India can finance the 2013-14 CAD without tapping into reserves.

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