The exit by foreign investors was triggered by the double whammy of rising crude prices and uncertain future for global trade.
The withdrawal of Rs 48,000 crore by foreign investors from the equity and debt markets in the first six months of this year does not come as a surprise. Foreign investors are fair weather friends. They invest when times are good and fetch them quick profits, but flee at the first signs of distress or weakness in the Indian economy. This is understandable as they are answerable to their clients whose funds they manage.
The reversal in global trade was envisaged by the 35-member Organisation for Economic Cooperation and Development, an inter-governmental body. Its April report said “Looking ahead, this is likely to reduce FDI flows in 2018 as US companies repatriate cash due to the one-time tax on undistributed foreign earnings included in the tax reform,” announced by US President Donald Trump.
The exit by foreign investors was triggered by the double whammy of rising crude prices and uncertain future for global trade. India’s economy is also still recovering from the devastating fallout of demonetisation and the flawed Goods and Services Tax.
Investors are additionally spooked by India’s dependence to the extent of almost 80 per cent for its crude oil needs. If crude oil prices continue to escalate, it will affect India’s current account and lead to a weakened rupee. In April-February 2017-18 India imported 83 per cent of its crude requirements amounting to 202 million tonnes.
There is an increasing uncertainty about the economic future of countries like India as a lot depends on how far Mr Trump goes to destabilise global trade. Added to this is Mr Trump’s threat to impose sanctions on Iran over the nuclear deal. Iran accounts for about four per cent of the world’s oil. India has also been told by the US to cut its imports from Iran, which India hopefully will not kowtow to. Iran is India’s third largest supplier of oil and provides this fuel in rupees and on favourable commercial terms. Will the US compensate India for its loss?
Rising crude prices will also lead to inflation and invite higher interest rates from the RBI. It is estimated that every $10 rise in price of crude oil increases India’s current account balance by 0.4 per cent of GDP.
Another reason for investors hot-footing it back to the US is the rising interest rates in the US. They would rather head back home and invest there than in risky assets abroad.
The US and Europe have been getting progressively insular and advising their firms to cater to the needs of the domestic economy. Mr Trump, for instance, has imposed a tax on overseas profits of companies as part of his tax reforms and America First policy.
That India was becoming less attractive as an investment destination was evident in May when India fell to 11th spot from eighth in global consultants A.T. Kearney’s Foreign Direct Investment Confidence Index 2018. China was ranked fifth, the lowest ever in its history, having slipped two spots. The silver lining is that the other emerging markets have also lost their sheen as attractive investment destinations.