Indian Minister of Finance P. Chidambaram will seek to drum up foreign investment from the US and Canada this week to fund a record-high current account deficit, even as policymakers debate the risks of over-reliance on foreign investors to finance the gap.
As Chidambaram starts a week-long North America trip, his officials are working on a series of steps to attract at least US$20 billion in new investment to fund the deficit without depleting India’s US$300 billion in foreign exchange reserves.
The proposals include raising the cap on foreign investment in rupee-denominated government debt by up to US$5 billion, reducing tax rates on such investments, making it easier for Indian firms to borrow abroad and easing curbs on foreign investment in sensitive sectors such as defense, telecoms and media, finance and trade, officials said.
The measures are still being formulated and have not been approved, the officials added.
Chidambaram, aiming to take advantage of a wave of cheap global funds, is to meet foreign investors in New York, Ottawa and Toronto, the latest stops in a global roadshow to talk up India as an investment destination.
The new push for foreign investment stems from India’s struggle to boost its merchandise exports in a fragile global economy and rein in a high import bill.
The government is now willing to tolerate a current account deficit of 5 percent, roughly double what it has typically aimed for, finance ministry officials said.
India’s current account deficit widened to an all-time high of 6.7 percent of GDP in October-December last year, driven by heavy oil and gold imports and muted exports.
Officials concede the strategy will make India far more dependent on foreign investors, exposing it to sudden reversals in capital flows, which could trigger a financial crisis.
Aninda Mitra, India economist at Capital Economics in Singapore, said much will depend on the global environment and the success of the government’s economic reform drive.
India currently allows US$76 billion of foreign investment in sovereign as well as corporate debt.