Time to focus on FDI flows to cut CAD: Kotak

Moneycontrol Bureau

Brokerage house says that the government should now focus on attracting long term overseas capital flows through foreign direct investment, to lower its current account deficit.

"The current scenario of strong FII flows helping to maintain a broadly neutral BOP (balance of payments) presents an opportunity for policy makers to attempt to shift capital flows towards FDI to reduce dependence on more volatile FII flows, should global liquidity weaken," said the Kotak note to clients.

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Economists are expecting the current account deficit for FY13 to be around 4.5 percent.

"Our calculations suggest that to sustain CAD/GDP of  around 3.5 percent (with a neutral BOP), India, on average, would need capital flows of USD95-100 bn each year. Of this, India needs to aim to attract USD 25-30 bn of FDI flows each year," the Kotak note says.

At the moment, India is heavily reliant on capital flows to finance its current account deficit as exports are under pressure due to a sluggish global economy.

Recent media reports say the government is considering increasing FDI limits in many sectors. But Kotak strategists caution that mere relaxation in FDI limits will not be enough to attract foreign capital.

"We note that some of the key factors that work in tandem with FDI limit easing to ensure desired capital flows are (1) market size, (2) quality of infrastructure, (3) political stability, (4) degree of bureaucracy and (5) economic growth potential. For India, we believe, the greatest challenges would be to improve the quality of infrastructure and ease of doing business through fewer delays in approvals and setting up processes," the Kotak note says.