Policy uncertainty hurting FDI inflows: RBI

New Delhi -  Foreign direct investment (FDI) inflows to India in recent years have been far below the potential mainly because of “policy uncertainty”, a Reserve Bank of India (RBI) report  said Wednesday.

A comparison of actual FDI flows to India vis-à-vis the potential level worked out on the basis of underlying macroeconomic fundamentals showed that actual FDI, which generally tracked the  potential level till 2009-10, fell short of its potential during 2010-11, it said.

The gross equity FDI flows to India moderated to $20.3 billion in 2010-11 from $27.1 billion in the preceding year.

The report suggested that institutional factors such as policy uncertainty were causing the slowdown in FDI inflows to India despite robustness of macroeconomic variables.

“Further, counter factual scenario attempted to segregate economic and non-economic factors seemed to suggest that the divergence between actual and potential during 2010-11 could  partly be on account of policy uncertainty,” it said.

The study pointed out that while FDI flows in other emerging market economies recovered in 2010-11 after the global economic crisis, the situation did not improve much in India mainly  because of the policy uncertainty.

“When the global FDI flows to emerging market economies recovered during 2010-11, FDI flows to India remained sluggish despite relatively better domestic economic performance ahead of

global recovery,” it said.

“This raised questions especially in the backdrop of the widening of the current account deficit beyond the sustainable level of about 3 percent,” it added.