The International Monetary Fund (IMF) in its India section of the External Sector Report has said that improving business climate, easing domestic supply bottlenecks and relaxing trade related norms will help India attract foreign direct investments (FDI), improve the current account deficit (CAD) situation and contain external vulnerabilities. It also said that although progress has been made on FDI liberalisation, portfolio flows remain controlled. It said the country’s trade barriers remain significant and added that steps to contain fiscal deficit should be accompanied with measures to enhance credit availability through faster cleanup of balance sheets of banks and corporates.
CAD, which is the net of foreign exchange inflows and outflows, increased to $57.2 billion or 2.1 per cent of Gross Domestic Product (GDP) in FY19 as against 1.8 per cent in the previous year. It noted that India's low per capita income, favourable growth prospects, demographic trends, and development needs justify the CAD. The IMF suggested for gradual liberalisation of portfolio investments, while monitoring risks of portfolio flow reversals. With CAD projected to continue in the medium term, the NIIP (Net International Investment Position)-to-the GDP ratio is expected to weaken marginally. A NIIP is the difference between a country's external financial assets and liabilities.
It also said that the moderate level of foreign liabilities reflects India's gradual approach to capital account liberalisation, which has focused mostly on attracting FDI. India's external debt is moderate compared with other emerging market economies, but rollover risks remain elevated in the short term. It added that the CAD is estimated to have increased to 2.5 per cent of the GDP in fiscal year 2018-19 from 1.9 per cent of GDP in the previous year, due to higher commodity prices and strong domestic demand in the first half of the fiscal year. It also said that FDI inflows are not yet sufficient to cover protracted and large CAD. FDI in India dipped by 1 per cent to $44.4 billion in 2018-19.
