It noted that India's low per capita income, favourable growth prospects, demographic trends, and development needs justify the CAD
Easing business climate and relaxing trade-related norms will help India attract foreign investors and improve the current account deficit situation, according to the International Monetary Fund (IMF).
The IMF in its India section of the External Sector Report has said that although progress has been made on foreign direct investment (FDI) liberalisation, portfolio flows remain controlled.
India's trade barriers remain significant, it said, adding steps to contain fiscal deficit should be accompanied with measures to enhance credit availability through faster cleanup of balance sheets of banks and corporates.
"Improving the business climate, easing domestic supply bottlenecks, and liberalising trade and investment will be important to help attract FDI (foreign direct investments), improve the CAD (current account) financing mix, and contain external vulnerabilities," the IMF said.
Current account deficit (CAD), which is the net of foreign exchange inflows and outflows, increased to USD 57.2 billion or 2.1% of GDP in FY19 as against 1.8% in the previous year.
It noted that India's low per capita income, favourable growth prospects, demographic trends, and development needs justify the CAD.
Further, the IMF has suggested for a gradual liberalisation of portfolio investments, while monitoring risks of portfolio flow reversals.
With CAD projected to continue in the medium term, the NIIP (Net International Investment Position)-to-the GDP ratio is expected to weaken marginally, IMF said.
A NIIP is a difference between a country's external financial assets and liabilities.
"The moderate level of foreign liabilities reflects India's gradual approach to capital account liberalisation, which has focused mostly on attracting FDI. India's external debt is moderate compared with other emerging market economies, but rollover risks remain elevated in the short term," the IMF said.
It added that the current account deficit is estimated to have increased to 2.5% of the GDP in fiscal year 2018-19 from 1.9% of GDP in the previous year, due to higher commodity prices and strong domestic demand in the first half of the fiscal year.
Over the medium term, the CAD is expected to remain about 2.5% of the GDP, it said, adding based on India's historical cash flow and capital inflow restrictions, global financial markets cannot be counted on to reliably finance a CAD above three% of the GDP.
Further, it said that FDI inflows are not yet sufficient to cover protracted and large CAD. FDI in India dipped by one% to USD 44.4 billion in 2018-19.
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