Sunday, December 5, 2021

India’s FOREX reserves hit all-time high

By: Dr. LEKHA S CHAKRABORTY, Professor National Institute of Public Finance & Policy & Research Associate, the Levy Economics Institute of Bard College, New York

The foreign exchange (FOREX) reserves in India have reached an all-time high of $ 608.081 billion, as per the data released by the Reserve Bank of India recently.  FOREX reserves mainly consist of Foreign Currency Assets (FCA), gold reserves and SDRs (Special Drawing Rights). The major source of rise in FOREX is foreign currency assets (FCA), which has increased by $ 2.567 billion to $ 563.457 billion.

Another component of the FOREX reserve is the gold reserve, which increased by $ 496 million to $38.101 billion this week. The RBI weekly data also shows that the special drawing rights (SDRs) with the International Monetary Fund (IMF) declined by $ 1 million to $ 1.512 billion in the week ended June 11. India’s reserve position with the International Monetary Fund (IMF) rose by $ 11 million to $ 5.011 billion in the same week, as per RBI data.

The World Investment Report 2021 by the UN Conference on Trade and Development (UNCTAD), which was released this week highlighted that India received $ 64 billion in Foreign Direct Investment (FDI) in 2020. India is the fifth-largest recipient of FDI inflows in the world, according to the UNCTAD report. The report said that the global FDI flows have been severely hit by the covid 19 pandemics. Globally, FDI flows have declined by 35 per cent in 2020 to $ 1 trillion from $ 1.5 trillion the previous year.

The major reason for this decline is the great lockdown caused by COVID-19 around countries to prevent the health crisis from cascading into a prolonged macroeconomic crisis. The lockdowns slowed down the existing investment projects. The economic recession led multinational enterprises (MNEs) to reassess new projects.

The main source of rise in FDI in India is the acquisitions in the information and communication technology (ICT) industry. This is because the pandemic has increased the demand for digital infrastructure and services. The FDI increased 27 per cent to $ 64 billion in 2020 in India from $ 51 billion in 2019, pushed up by making the country the fifth-largest FDI recipient in the world.

Globally, the demand for digital infrastructure has led to higher values of greenfield FDI project announcements targeting the ICT industry, rising by more than 22 per cent to $ 81 billion. Within the ICT industry, the significant announcement has included a $ 2.8 billion investment by Amazon in ICT infrastructure in India, said the UNCTAD report.

Due to the second wave of covid 19 pandemic, the announced greenfield projects in India contracted by 19 per cent to $ 24 billion.

The lockdown has affected India’s export-related manufacturing, said the UNCTAD report. However, the Production Linkage Incentive scheme, designed to attract manufacturing and export-oriented investments in priority industries including automotive and electronics can be a significant determinant of growth recovery and investment in the manufacturing sector. The second wave in April 2021 severely affected the main investment-oriented States like Maharashtra and Karnataka.

The M & A (mergers and acquisitions) in India has been a significant factor in the increase in FDI. The UNCTAD report mentioned that M&As in India in ICT, health, infrastructure and energy has led the FDI in South Asia to increase by 20 per cent to $ 71 million.  The report highlighted the large M&As in India included the acquisition of Jio Platforms by Jaadhu, a subsidiary of Facebook, the acquisition of Tower Infrastructure Trust by Canada’s Brookfield Infrastructure and GIC (Singapore); the sale of the electrical and automation division of Larsen & Toubro India, and Unilever India’s merger with GlaxoSmithKline Consumer Healthcare India, a subsidiary of GSK United Kingdom).

It is also to be noted that India ranked 18 out of the world’s top 20 economies for FDI outflows. India recorded an FDI outflow of $ 12 billion in 2020 as compared to $ 13 billion in 2019.  This FDI outflow from India was the reason why FDI outflows from South Asia fell 12 per cent to $ 12 billion. The UNCTAD report is hopeful that investment will stabilize when the free trade agreement (FTA) talks with the European Union (EU) is resumed. The report also mentioned India’s investment potential in Africa as another factor of significant growth recovery.

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