Wake up UPA, India is suffering from capital flight

There is very bad news for Finance Minister P Chidambaram in the Foreign Direct Investment (FDI) data from the first three months of the financial year 2013-14. According to RBI data, $7.6 billion of FDI flowed into India between April and June 2013, which in normal course ought to help the finance minister in his quest to finance the current account deficit, targeted at $ 70 billion in 2013-14. However, RBI data on outward FDI from India reveals that $11.2 billion flowed out of the country in the same period.

The conclusion is stark: India is suffering from capital flight where it hurts most, in direct investment, which is the only sustainable way (other than exports) to finance the current account deficit in a sustainable fashion.

The capital flight situation is deteriorating from the previous financial year.

In 2012-13 the country attracted $ 26.9 billion in FDI inflows while outflows totaled to around $26 billion. The minor surplus of inward FDI over outward FDI was of course no reason to rejoice. At India’s stage of development, with such huge potential in a large domestic market, both foreign and local capital should be pouring into India, rather than looking for better opportunities elsewhere. But such is the lack of confidence in the Government of India, and the complete absence of credibility in its policy pronouncements, that in net terms, capital flowed out of India in the first three months of 2013-14, notwithstanding Mr. Chidambaram’s claim of having stemmed the bleeding in the economy.

[caption id=“attachment_1030175” align=“alignleft” width=“380”] The mandarins of the Finance Ministry need only look at the list of Indian firms sending money overseas: it isn’t just the big boys like the Birlas or the Mittals or the Tatas; there are plenty of smaller firms. At an average, over 400 Indian firms are investing overseas every month of this year.[/caption]

A comparison of the first five months of calendar year 2013 with the first five months of calendar year 2012 on FDI outflows from India is even more devastating: between January and May 2012, the outflow of FDI from India was around $9.6 billion; between January and May 2013, it is just over $16 billion.

When will the UPA wake up and take note of the fact that it is not the world economy that is causing India’s slowdown, but the lack of confidence in domestic investors, so much so that they are willing to risk investment in overseas markets which are not exactly booming? The mandarins of the Finance Ministry need only look at the list of Indian firms sending money overseas: it isn’t just the big boys like the Birlas or the Mittals or the Tatas; there are plenty of smaller firms. At an average, over 400 Indian firms are investing overseas every month of this year.

Chidambaram will continue to ignore the trend of capital flight at his peril. He can try all the short-term fixes to rein in the current account deficit - raising duties, raising external debt limits, encouraging FII - but the fact is that they are all short-term fixes, with serious side-effects.

They are a risky palliative which could ultimately kill the patient. After all raising levels of foreign debt or attracting hot money leaves the economy more vulnerable in the medium term. There are only two sustainable ways to finance the current account deficit (exports and FDI) and Chidambaram is not focused on either. By trying to meddle with the rupee-dollar exchange rate the minister is preventing a firm upswing in exports - despite the evidence from the latest data which shows that the falling rupee has actually compressed imports and buoyed exports.

By ignoring the bottlenecks of the domestic economy, he is dissuading both foreign and domestic investors from putting their money into the India story.

In the end, political constraints may prevent Chidambaram from acting decisively to boost exports or attract investment.

His party will now allow him to let the rupee fall or to be bold with genuine pro-reform measures.

The only solution to end the dangerous flight of capital from India is the flight from office of the disastrous UPA Government.