FDI inflows from US, Euro zone take a hit

Last Updated: Sun, Jan 20, 2013 05:26 hrs

The economic crisis in the Euro zone and the uncertain recovery in the US have taken a toll on foreign direct investment (FDI) inflows into the country. In the April-October period, these declined 27 per cent to $14.78 billion, against $20.29 billion in the corresponding period of 2011-12.

Inflows from the US fell to $323 million, against $650 million in the year-ago period. In the April-October period, the US accounted for just two per cent of the total FDI flows into the country, against three per cent in the year-ago period and 7.3 per cent in the corresponding period of 2010-11.

Though the US averted the fiscal cliff', its economic growth may be hit and this may further impact capital inflows. However, quantitative easing of $40 billion a month, which started in September, may act as a cushion The net impact of the two factors was yet to be assessed, analysts said. The US economy grew 2.6 per cent annually in the quarter ended September, against 1.6 per cent in the year-ago period.

FDI from Germany fell 67 per cent to $0.48 billion, against $1.3 billion in April-October 2011. Its contribution to India's total FDI dropped from 6.7 per cent to three per cent.

Based on full-year figures, the German economy contracted about 0.5 per cent in the quarter ended December (sequentially) and two per cent in annualised terms, according to JP Morgan Chase.

"Germany is funding the Euro zone in times of sovereign crisis. It can hold the Euro zone only to a point of time, thereafter, its own growth will get affected", said an economist who tracks the Euro zone.

The Euro zone slipped into recession in the quarter ended September.

FDI from the UK stood at $611 million, against $2,563 million in April-October 2011-12, official data showed. In April-October, the UK accounted for about 12.62 per cent of the total inflows ; this fell to 4.13 per cent in the corresponding period this financial year.

* India stands at 132 out of 185 countries in the World Bank's ease of Doing Business 2013 report
* Though the government liberalised FDI regime, its impact on inflows is yet to be seen

High capital inflows are needed to finance India's widening current account deficit (CAD). During the quarter ended September, CAD touched an all-time high of 5.4 per cent of gross domestic product. This resulted in a drawdown of $0.2 billion during the quarter.

Though the government has liberalised the FDI regime in the retail, power exchange and aviation segments, its impact on FDI inflows is yet to be seen in a big way.

Unless India eased the doing business' scenario, it would lose out to its neighbours, including China, as liquidity improved in the developed world, said an analyst.

In the World Bank's Ease of Doing Business 2013' report, India was ranked 132 in the list of 185 countries. India's ranking deteriorated in seven of the 10 parameters in the survey this year, compared to that conducted last year.

The country lagged even struggling neighboring economies such as Pakistan, Nepal, Bangladesh and Sri Lanka.

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