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Trade and External Sector

October, 2012

Introduction

India is the fifth best country in the world for dynamic growing businesses, according to the Grant Thornton Global Dynamism Index. The index gives a reflection of how suitable an environment the country offers for dynamic businesses and states India as a very attractive market for doing business.

Significantly, India's economic confidence increased by eight percentage points to record 68 per cent in August 2012 as compared to the previous month, making it the fourth most economically confident country in the world, according to the 'Ipsos Economic Pulse of the World' survey.

Capital Inflows

India has been the favoured investment destination in Asia. The Indian financial market has witnessed favouritism from the investing diaspora as compared to its Asian counterparts, according to a report by Mecklai Financial.

India's foreign exchange reserves (Forex) stood at US$ 294.81 billion as on September 28, 2012, according to the Reserve Bank of India's (RBI) weekly statistical supplement. Foreign currency assets aggregated to US$ 259.96 billion and the value of gold reserves stood at US$ 28.13 billion.

Private equity (PE) activity in India witnessed an increase in August 2012 with a combined deal value of US$ 1.8 billion, the highest so far this year, according to the Dealtracker report by Grant Thornton. The PE deal value in August 2012 was three times higher than in the corresponding month of the previous year. The top sector for mergers and acquisitions (M&A) was real estate, accounting for 49 per cent of the deal value, followed by pharma, healthcare and biotech with a 20 per cent share.

The Government of India has allowed qualified foreign investors (QFIs) from six member-countries of the Gulf Cooperation Council (GCC) and 27 countries of the European Commission (EC) to invest in the Indian capital market to enhance foreign capital inflows. With this, a US$ 1 billion window over and above the current US$ 20 billion limit has been created for QFI investment in corporate bonds and mutual fund debt schemes. The Ministry of Finance has taken steps to facilitate a seamless and quick flow of foreign funds into the country.

Foreign Direct Investments (FDI)

The total amount of FDI inflow into India from April 2012 to June 2012 stood at US$ 5.36 billion, according to the latest data released by Department of Industrial Policy and Promotion (DIPP). The cumulative amount of FDI equity inflows (including ‘re-invested earnings’ and ‘other capital’) for April 2000 to June 2012 stood at US$ 260.91 billion.

FDI in the Indian retail sector is expected to create 10 million jobs in 10 years, according to a report by Indian Staffing Federation (ISF).

Foreign Institutional Investors (FIIs)

In the June 2012 quarter, FIIs sold US$ 349.68 million worth of equities in the Indian market. The net FII inflows in 2012 till September 14, 2012, amounted to US$ 13.19 billion, as compared to US$ 274 million in the corresponding period a year ago. India has obtained the highest FII inflows in 2012 so far among frequently tracked Asian markets.

The Government has been making concerted efforts to attract foreign investors to India. Some of the key steps taken recently are:

  • In the Budget 2011-12, the QFI scheme was introduced allowing foreign investors to invest in mutual funds, subject to certain conditions. On January 1, 2012, the Government of India expanded this scheme to allow QFIs to directly invest in Indian equity market. As announced in Budget 2012-13, QFI can now also invest in corporate bonds
  • On June 25, 2012, the FII limit for investment in Government Securities was enhanced by US$ 5 billion raising the cap to US$ 20 billion