BS provides a snapshot of India’s external sector

FOR A while now, foreign direct investments (FDI) into India have been surging. The bigger worry was the long spell of insipid growth, even contraction in exports. Over the past few months, both these variables have performed oddly.

FDI inflows in February fell to just $0.9 billion as against a $3.2 billion average over the previous 12 months. Is this the start of a reversal? According to an HSBC Global Research report, the long-term FDI outlook for India remains positive. As charts 1 and 2 show, India’s net FDI has benefitted by a near doubling of FDI inflows between 2013 and 2016 and a dip in FDI outflows. As a result, the net FDI was high enough to cover the current account deficit.

It is true, though, that the incremental flow in 2017 is unlikely to be as strong as 2016. This is primarily because unlike in 2014 and 2015, FDI in the digital economy (comprising outsourcing, telecommunications, e-commerce, etc) has started waning. Progressively more FDI is coming into the physical economy but such investments come with a lag. The overall FDI for the year, however, will continue to be high enough, as shown by chart 4.

As chart 5 shows, India’s merchandise exports have registered a sharp increase in the past couple of months both in volume as well as value terms. However, much of this increase is not due to improvements in structural bottlenecks in the domestic economy, which are the biggest determinants of India’s export performance. The rise is largely due to the bump-up in the global economic growth rate, as chart 6 shows. It is obvious, then, what the government needs to focus on in order to make the best of the rising tide of global growth.