Foreign finances as bad as domestic.

Foreign Direct Investment fell to a paltry $27 billion in 2012 compared to $32 billion in 2011. This is investment in business and manufacturing and as such is relatively stable and long term. China had FDI of $111.62 billion in 2012, more than 4 times as much. Foreign Institutional Investment, which is hot money invested in shares and bonds, was $25.6 billion in 2012, an increase 700% over 2011 when there was a marginal outflow. This is because western central banks are pumping excess money into their banks to encourage lending to businesses and for mortgages by buying up bonds, known as Quantitative Easing. Once US and European businesses start to expand again and the housing markets pick up this money could suddenly flow out bringing down the stock markets and the rupee.  Livemint 31 March. " Assuming India has a trade gap of $60 billion, at least $30-35 billion should be funded by foreign direct investment to bridge the deficit," said A Prasanna of ICICI Primary Dealership. Investment Income Outflow, which is interest and dividend payments on foreign liabilities, increased to $17.8 billion between April to December 2012. Short term credit rose 74% from $92 billion to $160 billion and total external debt is $376.3 billion. The government may feel that there is no threat with foreign currency reserves of $295 billion, equivalent to 6 months' imports, but things could become decidedly sticky if fund flows reverse suddenly or if speculators start to sell off the rupee. Thus the government is funding its foreign spending, most of it due to the purchase of oil and gold, from short term investments. This situation is very similar to what is happening in the domestic sector where public sector banks are financing long term lending in infrastructure and mortgages from short term deposits. While foreigners are pouring money into our share markets domestic mutual funds and insurance companies withdrew a record Rs 690.58 billion from stocks. Investors have been pulling money out of stocks for 9 straight months which is the longest in the last 5 years. They have pulled out a total of Rs 153.55 billion. In desperation the government has started the Rajiv Gandhi Equity Savings Scheme which seeks to ensnare naive first time investors in Indian shares. This gives tax relief on Rs 50,000 invested in shares for those who have never invested in shares and have income up to Rs 1 million a year. This type of investors are mainly to be found in small towns and villages so Asset Management Companies are swarming in such areas offering up to 6% commissions to trap as many people as they can. " The commissions paid by some fund houses are indeed very high. It is a mad rat race," said Nilesh Sathe, CEO of LIC Nomura Mutual Fund Asset Management Co. It is like a high wire act without a safety net. Scary.