FDI inflows slip 7% in November

Foreign direct investment (FDI) inflows slowed down further in November amid rising concerns that India was relying too much on volatile short term flows to fund its record-high current account deficit. Considered a more stable capital inflow, India-bound FDI dropped for the second consecutive month from a year ago in November. The country received FDI of $1.6 billion in November 2010, down 7% from the $1.72 in same month last year. The cumulative FDI inflow in the first eight months (April- November) of the current fiscal was $14 billion, a drop of 27.4% over the $19.32 billion in the corresponding year-ago period. The decline comes even as the government needs more foreign inflows to fund its record-high current account deficit, which has risen to 4.1% of GDP in the July-September quarter, highest in the last decade barring the anomalous crisis hit July-September 2008 quarter. The record-high deficit is being funded mostly through relatively unstable portfolio flows, creating concern that a moderation in inflows of outflow could create problems. As a result of the decline in the stable FDI inflows, the share of short-term debt in the total debt stock rose sharply to 22.3% at the end of September 2010 from 17.5% a year ago. Likewise, the ratio of short-term external debt to foreign exchange reserves rose to 22.5% at end-September 2010 as compared to 18.8% at end-March 2010. The slowdown in FDI inflows is largely because of the economic stress in the developed world, the source countries. India gets more than 42% of its FDI from Mauritius but much of it is third-country fund, routed indirectly because of the tax benefits available. A recent World Bank study expects FDI inflows into developing countries to recover over the next few years.

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