India Foreign Direct Investment Slumps 38%. PM, scrap PNotes NOW.

July 13, 2012, 5:57 a.m. ET

India Foreign Direct Investment Slumps 38%

By NUPUR ACHARYA

MUMBAI — Foreign direct investments in India fell 38% in the April-May period while foreign fund flows swung to a net negative, according to central bank data which reflect the battering the country’s appeal has taken in the past few months.

FDI flows into India in the first two months of the fiscal year which began April 1 dropped to $3.2 billion from $5.15 billion a year earlier. Also, foreign portfolio investors withdrew a net $1.4 billion, compared with an inflow of $1.82 billion a year earlier.

In May alone, net foreign direct investment more than halved from a year earlier to $1.38 billion, adding to worries about India’s current account deficit.

A fall in the flow of foreign money is quite a blow for India, which depends on the cash to finance its current account deficit, which widened to a record 4.5% of gross domestic product in the January-March period.

Madan Sabnavis, chief economist of Care Ratings, said that the drops were caused by a combination of factors.

“The kitty of global funds available for investment is small, and the problem is compounded by the fact that opportunities in India aren’t looking bright,” he said, while calling for policy reforms.

The government’s inability to push through vital changes — such as opening up the insurance, multi-brand retail and pension sectors to foreign investors — have damaged sentiment.

Slowing growth amid high budget and trade deficits and contentious tax laws have spooked investors as well, and caused a plunge in the value of the rupee.

The Indian currency has fallen nearly 10% against the dollar since April, wiping out the benefits of lower global commodity and oil prices. A stable rupee would have helped the central bank in its battle against India’s high inflation, which has scuttled hopes of interest rate cuts.

The Reserve Bank of India’s tight monetary stance has stifled growth in Asia’s third-largest economy, while troubles in the U.S. and Europe have also kept investors away from riskier markets.

The state of affairs led Standard & Poor’s and Fitch Ratings to warn India of a possible downgrade to junk status if it doesn’t get its fiscal house in order soon.

On the bright side, India’s trade deficit narrowed to $10.3 billion in June from $14.4 billion a year earlier – due mainly to a 13.46% drop in imports caused by a recent slide in crude oil prices.

The government has taken several steps — such as extending an import tax waiver on some capital goods — but their effects will begin to show only in about two to three months’ time.

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