Financing of India’s Balance of Payments

There has been an accepted view among the academicians and policymakers that the shift in BoP financing from debt to non-debt flows would expect to remove the vulnerabilities in India’s BoP. There must be a shift in the finance from debt to non-debt capital flows and minimisation of current account deficit was the two main recommendations of Rangarajan committee. Available evidence hardly shows any evidence of strengthening in India’s balance of payment because of the flow of FDI; rather they are creating additional strain on current account of BoP in recent period. This is because FDI firms have significant contribution to current account deficit in India especially after 2003-04 and it happened mainly due to their high trade imbalance (they are having high import relative to their export).Contrary to the expectation, foreign investment has imparted huge cost on BoP. Apart from dividend earnings, FPI also earns huge capital gain from India; a significant part of it was repatriated.