Cross-border equity offsets impact of FDI

MUMBAI: The sharp rise in cross-border direct equity flows has offset the impact of FDI on the country’s balance of payments. FDI inflows in the latest quarter have been neutralised by an equivalent amount of outflows.

According to the latest balance-of-payments figures released last week by RBI, net FDI inflows during April-June this year amounted to $461 million as compared to $1,416 million in the same period a year ago. This is because outward FDI had touched a new high of $5,442 million largely on account of funding big-ticket acquisitions like that of Anglo-Dutch steel company Corus by the Tata Steel while inward FDI amounted to $5,883 million.

A closer look at the numbers indicate that the fresh inflows are almost the same as outflows. This is because another component of FDI, namely, reinvested earning, which is essentially a book entry, does not involve actual forex inflows. Reinvested earnings accounted for $708 million of forex inflows and $271 million of outflows.

If one excludes this component, pure FDI inflows at $5,008 million almost equals pure FDI outflows during the period. After liberalising inward FDI policy from 1991 onwards as a part of its structural adjustment programme, the government revised the definition of FDI to include reinvested earnings following the recommendation of an RBI appointed committee in early 2002. By adopting this new definition, policymakers felt that it would now be possible to compare the trend in FDI in India with that in other countries.

In addition to equity, FDI includes equity capital of incorporated entities, and acquisitions of shares under Section 6 of the Foreign Exchange Management Act and other capital.