The global economy is seeing a slowdown in growth and is expected to grow by only 3.2% in the current year. In comparison, India is set to post a growth of nearly 8% in the 2011-12 fiscal. The worsening debt and unemployment situation in the Euro zone and doubts hanging over the US recovery will make India as one of the top destinations for foreign fund flows as investors look for higher returns.
India mainly depends on domestic factors for its growth, which means that it is not that deeply impacted by the weak global scenario in comparison to other countries. This was evident when India posted a 6.8% growth in 2008-09, which was the peak period of the global financial crises. The country's exports only contribute 13% to its annual economic output, with the share of private and public consumption being an aggregate 70% in the GDP. The country's public debt is also mainly from domestic sources. The relatively lesser dependency on global scenario puts India at an advantageous position against other emerging markets for foreign capital inflows.
India attracted a $32.4 billion of net FII inflows in 2009-10, at a time when global growth fell by 1% in 2009.The country has already attracted Rs 6,776 crore of FII inflows in 2011up till 5 July 2011. FDI inflows into the country reached $7.79 billion in April- May, 2011, compared with $ 4.39 billion during the same period last year. The FDI inflows are likely to increase further, with the country's economic policies in favour of foreign investment.
India stands to gain on account of reduction in international demand for key imported goods, such as crude oil, as this will lead to lower international prices of these goods and ease inflation in the country, and induce greater investment and growth. However, India's exports could be hurt on account of low international demand, though as long as consumption demand in the country's domestic market remains strong, the economy will keep performing well. Since 2007-08, India's consumption demand has seen over 8% annual growth.
India's growth in exports to other emerging market such as the Middle-East, North Africa and Latin America will help it to tide over the reduction in export demand from developed countries ,such as the US and Euro-zone. This is evident from the fact that India's exports grew by 30% plus, year-on-year in 2010- 11, when the demand in the developed markets considerably slowed.
However, analysts warn, that India will not be able to insulate itself from the impact of a serious international financial crises such as a debt default by a Euro- zone nation, as India is heavily dependent on capital fund flows for financing its current account deficit. The country's current account deficit stood at nearly 2% of its GDP in 2010-11, but it is expected to increase to 3% plus in the current fiscal. Global crises would dampen investor sentiment and divert investor fund flows from risky investments such as equity markets to less risky bets such as gold and the dollar. This will reduce FII and FDI flows into India.
View: Investors tend to invest based on risk and return perception. If they are gripped by the fear in a way that the proverb 'money should be kept under the bed', is the best way to define their behaviour, then there will be a flight in FDI and the local investor also. Or if they can get good returns on investment which matches post tax and currency fluctuations returns in India then also there will be a flight of capital from India. If these two extreme cases do not occur, and India's government take the few steps in the right direction then the interest of foreign investors in India will remain constant over a period of time.