The Reserve Bank of India (RBI) is concerned over a significant moderation in the flow of foreign direct investment (FDI) into the country in 2010-11.

This moderation in FDI flow must be read in the context of other emerging market economies in Asia and Latin America receiving large FDI inflows.

According a study by the apex bank, the moderation in investment flows in India despite a faster recovery from the crisis period “appears somewhat inexplicable”.

The study feels that this could be the result of “certain institutional factors that dampened the investors' sentiments despite continued strength of economic fundamentals.”

FDI trends in 10 select emerging market economies over the last seven years indicate that institutional factors such as time taken to meet various procedural needs indeed make a significant impact on FDI flows.

FDI flow into India rose from $ 6 billion in 2001-02 to $38 billion in 2008-09. “When there was a significant deceleration in global FDI flows during 2009-10 in the wake of global crisis, the decline in FDI flows into India was relatively moderate, reflecting robust equity flows on the back of a strong rebound in the domestic growth ahead of global recovery and steady reinvested earnings,” the RBI study says.

Recovery in flows

When there had been some recovery in global FDI flows during 2010-11, the gross FDI equity inflows into the country, however, saw a significant moderation at $20.3 billion in 2010-11, down from $27.1 billion in the preceding year.

Sector-wise study indicates that the moderation in gross equity FDI flows during 2010-11 is mainly driven by sectors such as construction, real estate and mining and services such as business and financial services. Manufacturing, too, had seen some moderation, reports the study. “Policies in terms qualitative parameters such as time to lease private land, access to land information and extend of judicial assistance are relatively more conservative in India,” finds the study. “Since the time taken to set up a project adds to the cost and affect competitiveness,” the otherwise liberal policy regime “may turn out to be less competitive or economically unviable owing to procedural delays,” the study argues.

FDI is known to be the most stable component of capital flows needed to finance the current account deficit. Besides adding to investible resources, FDI also provides access to advanced technology.

Given these and coming as it does in the wake of no significant deterioration in Indian macro economic performance vis-à-vis select emerging market economies, the moderation in FDI flow “points to a probable role of institutional factors that might have discouraged FDI inflows,” the study concludes.

Keywords: FDI normsRBI