The Reserve Bank of India said there is a need to further improve foreign direct investment (FDI) inflows in sectors such as insurance, retail, aviation and urban infrastructure.
The central bank, which has made this suggestion in its Annual Report for 2011-12 , said this will augment non-debt creating flows and keep the composition of India’s external liabilities at a comfortable level.
On the apprehensions over FDI in multi-brand retail, the RBI said international experience on the whole suggests that allowing FDI in retailing space leads to increased competition.
Empirical evidence also suggests that increased competition in retail space results in lower prices, which improves consumer welfare, benefiting low-income households the most.
The RBI said FDI in retail may be particularly helpful in improving supply chain management through greater investment in backend infrastructure, including cold storage for farm and poultry products.
Non-debt creating flows need to be augmented. This is because increasing recourse to debt flows and drawdown of foreign exchange reserves to finance the current account deficit led to various external sector vulnerability indicators deterioration considerably in 2011-12.
Current account deficit (CAD) arises when a country's total imports of goods, services and transfers’ is greater than exports.
Contain CAD
Subdued exports and relatively inelastic imports of oil and gold have affected the CAD, which rose to $78.2 billion (4.2 per cent of GDP) in FY12 from $46 billion (2.7 per cent of GDP) in the year-ago period. Going forward, the weaker rupee, supplemented by other necessary policy responses can help contain the CAD, the RBI said.
The central bank observed that the external sector scenario needs continuous monitoring so that growth in imports of price insensitive items such as oil and gold does not impinge upon the trade deficit and CAD stays within the sustainable range and does not act as a drag on India’s foreign exchange reserves.