Expert Zone

Straight from the Specialists

Investment boost needed to break India’s vicious cycle

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(Any opinions expressed here are those of the author and not necessarily of Reuters)

The current account balance reported last month hammered in the fact that India is spending more than it saves. While it had been stubbornly in the red for all but a couple of years in the last two decades, reaching a record deficit in both absolute terms and in relation to the gross domestic product was sobering.

In practical terms, a current account deficit even at its current level is not bad in itself. However, it does imply that foreigners must be willing to finance the gap. And if the fund flows dry up, it could create economic imbalances including a weakening currency.

For the most part, these fund flows come in the form of either portfolio investments that can be moved freely, like in the stock market or direct investments that are more long term. While foreign direct investment is still flowing and has allowed the rupee to stabilize since the start of the year, a deeper look into its composition raises some concern.

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