Better business climate, trade norms will help India attract FDI: IMF

Easing business climate and relaxing trade related norms will help India attract foreign investors and improve the current account deficit situation, according to International Monetary Fund (IMF).

 

The IMF in its India section of the External Sector Report has said that although progress has been made on foreign direct investment (FDI) liberalisation, portfolio flows remain controlled.

 

India's trade barriers remain significant, it said, adding steps to contain fiscal deficit should be accompanied with measures to enhance credit availability through faster cleanup of balance sheets of banks and corporates.

 

Improving the business climate, easing domestic supply bottlenecks, and liberalising trade and investment will be important to help attract FDI (foreign direct investments), improve the CA (current account) financing mix, and contain external vulnerabilities, the IMF said.

 

Current account deficit (CAD), which is the net of foreign exchange inflows and outflows, increased to USD 57.2 billion or 2.1 per cent of GDP in FY19 as against 1.8 per cent in the previous year.

 

It noted that India's low per capita income, favourable growth prospects, demographic trends, and development needs justify the CAD.

 

Further, the IMF has suggested for gradual liberalisation of portfolio investments, while monitoring risks of portfolio flow reversals.

 

With CAD projected to continue in the medium term, the NIIP (Net International Investment Position)-to-the GDP ratio is expected to weaken marginally, IMF said.

 

A NIIP is the difference between a country's external financial assets and liabilities.

 

The moderate level of foreign liabilities reflects India's gradual approach to capital account liberalisation, which has focused mostly on attracting FDI. India's external debt is moderate compared with other emerging market economies, but rollover risks remain elevated in the short term, the IMF said.