INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

HIGHEST FII INFLOWS AMONG NEW MKTS

   INDIA has one of the highest exposure to FII inflows among emerging economies. While in India , FIIs formed nearly 70% of foreign investment (FDI plus net portfolio equity flows), in China and Brazil , the percentage was 26% and 30% respectively for 2005. Unlike India , a major chunk of foreign investment entered China , Brazil and Russia as FDI.

India , on the other hand, attracted nearly 20% of the net portfolio investments flowing into developing countries while its FDI inflows were barely 2.4% of what was received by emerging economies, according to data from the Global Development Finance Report, 2006.

During January-December 2005, while India 's current account deficit stood at $13 billion, it had a large capital account surplus amounting to $26 billion.

Nearly half of these inflows, however, were portfolio investments, which are considered volatile by RBI. In comparison, not only are the other three BRIC economies running a surplus in their current account, Brazil and Russia received nearly $15 billion of FDI each in 2005, and China received close to $53 billion, forming a substantial portion of the capital inflows. India , on the other hand, received barely $6.5 billion.

While the recent FII outflows have raised questions on the vulnerability of India 's balance of payments (BoP), some economists feel the fears of FII volatility and its impact on the country's BoP are unfounded. Even if FIIs decide to exit the market, other sources of inflows including remittances and NRI deposits will continue to provide dollar inflows. Moreover, the country's forex reserve cushion of $150 billion will more than cover the country's import requirements.

What is worrisome, however, is the impact on the exchange rate of heavy FII volatility and the lack of FDI inflows compared to other emerging markets. A flight of porftfolio investment from the country can put pressure on the rupee and result in its depreciation. FII outflows in the last few weeks have been a major reason for the rupee depreciation.

INDIA Inc's special economic zone (SEZ) party has met a dramatic turn: a House Full board is staring at those who are seeking to join the SEZ bandwagon. The government has decided to cap the number of SEZs in the country at 150. Since 164 SEZ projects have already obtained in-principle clearance from the government, corporates seeking permission to enter the business face disappointment.

The decision to impose a cap of 150 on SEZs follows a suggestion from the finance ministry which is opposed to ‘proliferation' of SEZs. The move is aimed at preventing migration of industrial units to SEZs to avail income-tax benefits.

The decision, which virtually draws curtains on all pending SEZ applications, was taken at a meeting of the empowered group of ministers (eGOM) on SEZs, headed by defence minister Pranab Mukherjee. With this, the mega battle within the government over concessions to SEZs is expected to hot up further.

The finance ministry had, in a letter to the eGOM, sought a cap of 100 –– or, at the most, 125 –– on SEZs. The commerce & industry ministry tried to defend the situation, explaining that the board of approval (BoA) would exercise extreme caution to check against migration of investment to SEZs.

However, the finance ministry was emphatic that SEZs are meant for fresh investments and only new investments should be approved. Therefore, the eGOM decided to impose an ‘initial' ceiling of 150 but it was not announced since it.