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Trade and External Sector

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Trade and External Sector

November, 2011

Introduction

Growth in capital inflows, foreign direct investment (FDI), foreign institutional investment (FII) and exports has given an intense impetus to the progress of India’s trade and external sector. While Institutional dealers bet big on Indian FII ecosystem for the years to come and anticipate 2012 to be a wonderful period, a research by Morgan Stanley anticipates that India could attract FDI worth as much as US$ 80 billion in next 1-2 years.

Capital Inflows

India's foreign exchange (Forex) reserves have increased by US$ 858 million to US$ 318.4 billion for the week ended October 21, 2011, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI). In the considered week, foreign currency assets went up by US$ 861 million to US$ 282.5 billion, while the gold reserves stood at US$ 28.7 billion.

FDI

FDI inflow rose by 50 per cent to US$ 20.76 billion during January-August 2011, while the cumulative amount of FDI equity inflows from April 2000 to August 2011 stood at US$ 219.14 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP).

The services service (including financial and non-financial) sectors attracted highest FDI equity inflows during April-August 2011-12 at US$ 2.88 billion. India received maximum FDI from countries like Mauritius, Singapore, and the US at US$ 60.17 billion, US$ 14.92 billion and US$ 9.91 billion, respectively, during April 2000-August 2011.

Quenching its thirst for foreign assets, India Inc announced 177 M&A deals worth US$ 26.8 billion in the first nine months of 2011. For the quarter July-September 2011, inbound deals worth US$ 7.32 billion were registered as against the deals worth US$ 2.65 billion in the previous quarter; total value being largely accounted for by two mega deals - BP's US$ 7.2 billion acquisition of stake in Reliance Industries' oil and gas properties and Vodafone Group's purchase of partner Essar's 33 per cent stake in Vodafone Essar Limited for US$ 5.46 billion.

Third quarter for 2011 also witnessed a high jump in cross-border transactions, wherein 63 such deals worth US$ 4.88 billion were announced. Furthermore, the total value of outbound deals, Indian companies acquiring businesses outside India, in the reported quarter was recorded at 29 deals worth US$ 3.69 billion, said the data released by global consultancy firm Grant Thornton.

FII

FIIs net investment for the month of September 2011 stood at US$ 6.97 million and their injections from January – August 2011 stood at over US$ 2 billion.

According to latest data released by Securities and Exchange Board of India (SEBI), 21 institutions registered as FIIs with the regulator in 2011-12 (till September), enhancing the presence of registered FIIs to 1,743. Moreover, the number of registered sub-accounts has increased by 342, taking the count to 6,028 in September 2011. Both figures are all-time highs.

Moreover, data available at Bombay Stock Exchange (BSE) reveals that FIIs have increased their stake in ten out of 100 companies in quarter ended September 2011.

FII holdings through participatory notes or P-notes have also increased by 1.4 per cent in equities and debt instruments, including the derivatives, in August 2011. FII’s P-note position was noted at 15.4 per cent in August, as against 14 per cent in July 2011, according to the SEBI data.

Exports

India's exports recorded a growth of 36 per cent to US$ 24.82 billion during September 2011, while they increased by 52 per cent during April-September 2011 to touch US$ 160.04 billion in terms of value, due to high growth in sectors including cars, petroleum products and precious stones.

The government’s new ‘incentive’ package for exporters seems to have paid off seeing the growth in exports. Provisions like market-linked focus product scheme, market diversification and interest subvention to incentivise export are expected to boost external trade from the country. It is being said that the new measures are part of the Foreign Trade Policy (2009-14) and will be incorporated in its next annual supplement. Clearly, the government's trade policy is aggressively promoting diversification of Indian exports to non-conventional markets and products. It has been announced that about 50 products in the engineering, pharmaceuticals, and chemicals sectors would get the special bonus, subject to certain conditions.

Due to sluggish demand in the US and crisis in Europe, Indian exporters are on a search spree for newer markets for their products, expecting to close 2011-12 with US$ 280 billion worth of exports. Mr Jyotiraditya Scindia, Minister of State for Commerce and Industry, has stated that developing economies like Latin America, Africa, parts of Asia, Indonesia and Oceana hold potential for Indian exports. During the first quarter of 2011-12, country's exports to Africa and Latin America witnessed an increase of around 120 per cent and 74 per cent, respectively.