India Considers Allowing More Foreign Investment

NEW DELHI â€" The finance minister of India will seek to drum up investment from the United States and Canada this week to reduce a record current account deficit, even as policy makers debate the risks of overreliance on foreign investors to close the gap.

As Finance Minister Palaniappan Chidambaram starts a weeklong North American trip, policy makers are working on a series of steps to attract at least $20 billion in new investment to reduce the deficit without depleting India’s $300 billion in foreign exchange reserves.

The proposals include raising the cap on foreign investment in rupee-denominated government debt by as much as $5 billion; reducing tax rates on such investments; making it easier for Indian companies to borrow abroad; and easing curbs on foreign investment in sensitive sectors like the military, telecommunications and media, Finance Ministry officials said.

The measures are still being formulated and have not been approved, the officials stressed. They were not authorized to speak on the record.

Mr. Chidambaram, aiming to take advantage of inexpensive global funds, will meet investors in New York, Ottawa and Toronto, the latest stops in a global tour to promote India as an investment destination.

The push for foreign investment is seen as part of an important but potentially risky shift in the way India approaches its growing current account deficit, which has emerged as the government’s biggest economic worry.

“We will take all steps to ensure that inflows remain strong for the next two years,” Prime Minister Manmohan Singh told a gathering of executives in New Delhi this month.

The new push for foreign investment stems from India’s struggle to expand its merchandise exports in a fragile global economy and control a large import bill. The government is now willing to tolerate a current account deficit of 5 percent, about double what it has typically aimed for, Finance Ministry officials said.

The Indian current account deficit widened to a record 6.7 percent of gross domestic product in October-December, driven by imports of oil and gold and muted exports.

The failure to attract sufficient capital inflows precipitated a balance of payment crisis in 1991, when the central bank had to fly 47 metric tons of gold to Europe as collateral for a loan to avert a sovereign default.

“The size of the deficit in itself is not a problem, if you can comfortably finance it,” said an official familiar with the funding proposals being considered by the government, who was not authorized to speak to the news media.

Officials concede the strategy will make India far more dependent on foreign investors, exposing it to sudden reversals in capital flows, which could bring on a financial crisis.

“But we do not have really too much of a choice other than relying on portfolio inflows,” said Jyotinder Kaur, an economist at HDFC Bank.

Aninda Mitra, India economist at Capital Economics in Singapore, said much would depend on the global environment and the success of the government’s economic overhauls.

“Capital inflows will depend on the risk-seeking behavior of global investors as well as the policies of the major central banks,” he said. “Sentiment about India and the future of reforms will also determine the direction of short-term flows.”

India allows $76 billion of foreign investment in sovereign as well as corporate debt.

Finance Ministry officials said one of the proposals under consideration would address a longstanding demand of foreign institutional investors to reduce the withholding tax on all rupee-denominated bonds to 5 percent from 20 percent. A decision is likely by the end of May.

Mr. Chidambaram is also considering raising the ceiling on Indian firms’ borrowing from offshore money markets as soon as the existing cap of $40 billion is exhausted, they said.

He is pushing strongly for a re-examining caps on foreign direct investment in sectors like the military and print and broadcast media to 49 percent from 26 percent, but has faced opposition from more protectionist colleagues in the cabinet.

Finance Ministry officials said the changes could raise $3 billion to $5 billion in additional investment. But the government has so far failed to win parliamentary approval for proposals to increase foreign investment in the insurance and pension sectors.

A version of this article appeared in print on April 15, 2013, in The International Herald Tribune.