New Delhi: Prime Minister's Economic Advisory Council (PMEAC) on Monday suggested further liberlisation of foreign investment policy to keep the current account deficit (CAD) under check.
"Given our growth needs, a moderate trade deficit and CAD are inevitable. To finance the CAD, foreign investment flows need to be promoted. However CAD to be contained below 2.5 percent of the GDP," PMEAC Chairman C Rangarajan said in its economic performance and growth outlook.
"Though a majority of sectors have been liberalised but there are a few issues whose resolution will pave way for larger flows. As there are apparent signs of flowing down of foreign investment flows, we need to be proactive in promoting the flow of such investment," he said.
As per the forecast, CAD for the current fiscal is expected to increase to USD 54 billion (2.7 percent of GDP) from USD 44.3 billion (2.6 percent of GDP) in 2010-11.
Even though, he said, the CAD in 2010-11 was lower but the question of sustainability is relevant in view of the slackening of capital flows.
"Given the current trends in the the world economy, we should strive to contain the CAD below 2.5 percent of the GDP. This will itself mean a larger inflow of capital in absolute amount as our GDP keeps growing," he said.
"In 2011-12, we expect the total capital inflows should be slightly better at USD 72 billion," he said, adding, it was USD 61.9 billion in the last fiscal.
The financing of the present CAD is largely by portfolio equity and FDI flows. India's success in attracting portfolio equity flows can be attributed to the absence of quantitative restrictions which need to be emulated, he said.
However, FII inflows projected to be USD 14 billion which is less than half that of the last year pegged at USD 30.3 billion.
FDI inflows projected at USD 35 billion in the current fiscal against the level of USD 23.4 billion in 2010-11.
"In fact, in the first quarter, indication FDI were much higher. Therefore, if the growth rate is maintained at 8.2 percent in the current year and the industry continues to grow, I think we will be able to attract more foreign investment," he said.
"We have taken trends which show it might pick up. Quite a part of portfolio investment is in the IPOs. Last year or the year before...30 percent of the portfolios were in the IPO," he said.
PTI
