Is India looking at a capital crunch ahead? The way India’s markets have been battered in the past month is worrying enough, but a more alarming trend has been running for nearly a year now: foreigners are wary of committing longterm capital to the country.
Approved foreign direct investment—mainly in mines and factories—fell 27% between April and November from a year earlier, according to the latest data available. FDI had been falling even as a record $29 billion flowed into the country’s stock markets during 2010. This makes India the only major nation in Asia to witness a decline in FDI last year, according to the United Nations Conference on Trade And Development.
In contrast, annual FDI nearly doubled in the years just before the global financial crisis, a faster pace than the increases in foreign purchases of Indian stocks and bonds. And even when the markets began to collapse in 2008, FDI grew at a healthy 72%.