FDI and Foreign Exchange Outflows: Evidence from Current Account Transactions of Manufacturing Foreign Affiliates in India

In view of the commonly acknowledged positive contribution of Foreign Direct Investment (FDI) on the capital account of Balance of Payments (BoP) of India since 1991 under liberalization wave, the current account impact of FDI has received far less policy attention. However, through high foreign exchange outflows via imports and other expenses coupled with limited exports, FDI invested firms (firms having inward foreign direct investment) may have substantially contributed to the current account deficit in India over post-reform phase marked by substantive trade liberalization initiatives. The study evaluates net current account impact of FDI in India by reviewing various current account transactions of Multinational Corporations (MNC) affiliated manufacturing FDI invested firms from official data sources like RBI and direct firm level trade data from the company’s annual financial disclosures for some recent years. FDI invested MNC affiliates in manufacturing, at an aggregate level, were found to be associated with net foreign exchange outflows on current and trade accounts in various post-reform years. In the firm level study covering two years, this adverse pattern was noted for a majority of total firms, and also for a majority of firms in nearly each industrial sub-groups. Substantially rising net foreign exchange expenses were observed for a consistent set of select manufacturing FDI invested firms over a longer phase in the post-reform period. Apparently, FDI may not be a sustainable tool to manage current account challenges in a developing country like India unless policy caution is applied while engaging further with FDI inflows.