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The massive surge in investment by foreign institutional investors (FII) after the Fed rate cut has prompted RBI to propose further liberalisation in norms of foreign investment by Indian companies, residents and mutual funds (ET September 25). FII inflows stood at a staggering $1.5 billion and the Central bank proposed to increase outward investment to control liquidity and rein in rupee.

May be further liberalisation of norms would increase outflow of funds and help to control the liquidity position, but the fact is that India’s investment abroad has already been increasing rapidly. In five years, between 2001-02 and 2006-07, total international assets of India has increased at an annual compound rate of 24.2% against 12.6% annual rise in total international liabilities. The net international liabilities as a result, have gone down by over 40% from Rs 3,37,285 crore in 2001-02 to Rs 1,97,390 crore in 2006-07.

India’s direct investment abroad, of which equity capital and reinvested earnings account for 90%, has increased by more than five times from Rs 19,550 crore in 2001-02 to Rs 1,04,494 crore last year. In 2006-07 alone the direct investment outflows increased by 80% over 2005-06. In contrast, direct investment inflows to India during 2001-02 to 2006-07 has increased by about two and a half times from Rs 1,21,043 crore to Rs 3,15,339 crore.

And if in actual terms, the net inflows of direct investment have more than doubled during this period what is significant is that direct investment outflow from India is growing at a faster rate now and more liberalisation of norms will boost its growth further narrowing down the gap. In fact, the outflow under direct investment had stagnated during the early part of the current decade and only during the last two years after liberalisation of norms of outward investment, it has grown rapidly.

But if India’s direct investment abroad is rising at a higher rate than inflows, the gap between inflows and outflows of portfolio investment has been widening rapidly over the years. Not surprising. For, the recent spurt in stock prices has made Indian bourses most sought-after investment destinations of late.

Total inflows of portfolio investment has more than doubled during the last five years from Rs 1,53,915 crore in 2001-02 to Rs 3,49,841 crore in 2006-07. Investment in equity securities which accounts for about 70% of the total portfolio investment has gone up three times during the period from Rs 90,833 crore to Rs 2,75,812 crore.

Total outflow under portfolio investment during the same period in contrast, has increased by only 8% from Rs 3,188 crore to Rs 3,441 crore. Investment in equity has remained unchanged during the period. May be RBI’s recent proposals will pave the way for higher portfolio investment abroad. For, although the government had made a case for a liberal dispensation for Indian mutual funds to invest abroad in the past, the enabling approvals for investing in a range of products overseas were yet to be granted.
The biggest component of India’s international liabilities was, however, loan which accounts for 28% of aggregate liabilities in 2006-07. This may be due to ongoing technological upgrading and expansion of domestic industrial activities, RBI has observed. Higher investment demand by Indian companies are reflected in increase of external commercial borrowings.

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