Govt sees minimum impact of slowdown on foreign capital

The Union government hopes to get around $40 billion worth of foreign investment in India in 2009-2010 despite recessionary pressures hitting capital inflows globally.

Gopal Krishna, joint secretary, Union commerce ministry, told FE the government expects to get $40 billion worth of foreign capital in 2009-2010 against $48 billion in 2008-09.

?This can?t be called a downturn of foreign capital inflows because there will be an overall contraction of foreign investments globally,? he said. .

Till June of the fiscal, India has got foreign capital to the tune of $7 billion, which shows that inflows are steady, he said.

Globally, inflow of foreign capital will come down to $1.2 trillion in 2009 from $ 1.6 trillion in 2008. Flow of foreign capital globally was higher in 2007 at $1.8 trillion.

Although foreign investment in India this year is expected to be lower by $8 billion, in terms of percentage, India will fare better this year because of a shrunken global base. India?s share would be around 2% of the total foreign capital inflows across the globe, a jump from 1.25% in 2008.

However, India is still below its potential in attracting foreign direct investment (FDI), particularly in the manufacturing sector. The chunk of money is flowing into the services sector.

While the manufacturing sector could attract only $4.5 billion worth of FDI in 2008-09, the services sector could attract $15 billion. The rest of the $48 billion inflows went to the capital market, Krishna said.

?India?s contribution is 6% to the world economy. So India should ideally get above 5% of the total foreign capital inflows across the globe,? Krishna said.

He said while division between hot money, institutional money and participatory notes are getting thinner; most of the sectors have opened up for FDI up to 100%.

In 1995, only 35 sectors were open to FDI up to 51%. In 1997, 111 sectors were open for FDI up to 100%. Post 2000, there were further opening up of sectors, equity caps were raised, though Foreign Exchange Management Act (FEMA) of 1999 was enacted.

More than 85% of the FDI comes under the automatic route at present, Krishna said.

Although India and China are the most preferred destinations for foreign investors at present, India is way behind China in getting foreign capital. China got $75 billion worth of foreign capital against India?s $48 billion in 2008-09, according to an United Nations Conference on Trade and Development (UNCTAD) report.

However, China has the advantage of starting liberalisation early, way back in 1977, for which it could develop a better mechanism of attracting foreign capital. Infrastructure issues, labour laws and regulatory burdens are coming in the way of getting more foreign money, Krishna said.

He said while Maharashtra topped the list in 2008-09 with 36% of the country?s total FDI coming to its kitty, Delhi ranked second with 16.54%, followed by Karnataka with 6.62% and Gujarat with 6.42%. West Bengal ranked eighth getting 1.76% of the country?s total FDI in 2008-09.