According to International Monitory Fund (IMF), easing the existing business climate and relaxing trade policies and norms will help India attract more foreign direct investment, which will improve the current account deficit situation.
In its External Sector Report for India, the International Monitory Fund has said that even though liberalization of foreign direct investment in India has witnessed progress, portfolio flows continue to remain controlled.
India’s trade barriers persist to be significant, it said, adding steps to contain fiscal deficit should be accompanied with measures to enhance credit availability through faster clean- up of balance sheets of banks and corporates.
“Improving the business climate, easing domestic supply bottlenecks, and liberalising trade and investment will be important to help attract FDI (foreign direct investments), improve the CA (current account) financing mix, and contain external vulnerabilities,” the IMF said.
The IMF also said that the country’s low per capita income, favourable growth prospects, demographic trends, and developments need to justify the current account deficit (CAD).
Current account deficit or CAD is the net of foreign exchange inflows and outflows. CAD increased to 57.2 billion dollars or 2.1 per cent of Gross Domestic Product (GDP in fiscal year 2019 compared to 1.8 per cent in the previous fiscal year.
The IMF also suggested the gradual liberalization and opening up of portfolio investments, while monitoring risks of portfolio flow reversals.
With current account deficit projected to continue to medium term, the NIIP (Net International Investment Position)-to-the GDP ratio is expected to weaken marginally, International Monitory Fund said.
For the uninitiated, A NIIP or Net International Investment Portfolio is the difference between a country’s external financial assets and liabilities.
“The moderate level of foreign liabilities reflects India’s gradual approach to capital account liberalisation, which has focused mostly on attracting FDI. India’s external debt is moderate compared with other emerging market economies, but rollover risks remain elevated in the short term,” the IMF said. Apart from this, the IMF also said that the current account deficit is estimated to have risen to 2.5 per cent of the GDP in fiscal year 2018-19 from 1.9 per cent of GDP in the previous year. This increase was credited to higher commodity prices and strong domestic demand in the first half of the fiscal year.