New Delhi: The International Monetary Fund (IMF) has said that India, which has received a record number of foreign direct investment (FDI) in the past few years inspite of the raging pandemic, has a number of safeguards in place to diminish the risks from capital flows.
According to a report by the PTI, IMF’s First Deputy Managing Director Gita Gopinath said that capital flows have several benefits.
In her speech, she mentioned they finance needed investments, help insure against some kinds of risks. There are many benefits to countries from having capital flows in India and also benefits from receiving those capital flows, she said.
On Tuesday, Finance Minister Nirmala Sitharaman said in the Rajya Sabha that FDI into the country during the Modi government was $500.5 billion and India continues to remain among the top five FDI recipient countries in the world.
India’s FDI inflow in 2020-21 was $81.72 billion compared to $74.9 billion in the preceding financial year.
Gopinath said there are other kinds of financial risks associated with having large amounts of capital inflows.
For India, there are a large number of capital restrictions already in place. The government uses these curbs proactively in dealing when the external environment changes. So, by putting restrictions on the amount of external borrowing the corporates can do, that is an instrument that they use. And they use it in response to changing external circumstances.
She said there are a few buffers that the Indian economy has in place for capital flows. "Though, it is still in the process of liberalising its capital accounts, and as its financial markets deepen, its financial institutions deepen, it could move towards more, allowing for more forms of capital flows," Gopinath said.
She mentioned that capital flows are desirable because they can bring substantial benefits to recipient countries. But they can also result in macro-economic challenges and financial stability risks.
“The dramatic capital outflows we witnessed at the start of the global pandemic, and the recent turbulence and capital flows to some emerging markets following the war in Ukraine are stark reminders of how volatile capital flows can be and the impact this can have on economies,” Gopinath added.
According to the report, the IMF has released a paper on the Review of the Institutional View (IV) on the Liberalization and Management of Capital Flows. The IV was adopted in 2012 and provides the basis for consistent fund advice on policies related to capital flows.