Information about Asia and the Pacific Asia y el Pacífico
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India: Selected Issues

International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2017
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Capital Controls and Capital Flows to India1

The gradual liberalization of the capital account management in India has not been reflected in often-used capital account openness indices. The IMF’s recently-developed de jure indices suggest that Indian inflows are more liberalized than outflows. A continuation of policies to carefully open up the Indian capital account to attract stable capital inflows would benefit the Indian economy.

1. India’s capital account management has been gradually liberalized over the last past two decades. The pace of liberalization has differed across time and across different types of capital inflows. In the 1980s, India’s capital account was closed with limited opportunities for foreign direct investment (FDI) inflows. Following the economic liberalization program of the early 1990s, gradual capital account liberalization was launched, allowing for some FDI and portfolio inflows into the equity markets. Later, some commercial debt operations were also permitted.

2. Helped by this gradual capital account liberalization, capital account flows have significantly increased in India. Indian inflows and outflows have risen across different types of capital account flows over the last two decades (Figure 1). That being said, global events, including the 2008-09 global financial crisis, also had an impact on capital flows.

Figure 1.India: Capital Flows

Sources: IMF, World Economic Outlook; and IMF Balance of Payments and International Investment Position Statistics.

3. Most recently, the Government of India has implemented substantial FDI policy reforms to attract greater FDI flows. FDI flows are governed by the Consolidated FDI Policy (which is revised by the government on a regular basis) and is subject to sectoral laws and regulations on flows into specific industries. The Consolidated FDI Policy defines sectors into which FDI flows are permitted, the aggregate limits on FDI flows into specific sectors, and their approval route. FDI inflows are allowed either under the automatic route (which does not require any approval of the government) or government route (which does require prior approval by the government). Over the last two years, the government has relaxed previous caps on foreign investments in different sectors and allowed most of the foreign investments to enter sectors of the Indian economy under the automatic route (Table 1). Most notably, the regulatory changes affected investments in the air services sector, broadcasting, defense, and pharmaceuticals.

Table 1.India: Changes in FDI Policies Between 2014 and 2016
FDI CapApproval Route
Sector/Industry2014 1/2016 2/2014 1/2016 2/
Tea plantation100%100%GovernmentAutomatic
Defense industry subject to industrial license26%100%Government route up to 26%.Automatic route up to 49%.
Broadcasting carriage services: teleports, direct toAutomatic up to 49%.
home, cable networks, mobile TV, headend-in-the-74%100%Government route between 49%Automatic
sky broadcasting serviceand 74%
Cable networks49%100%AutomaticAutomatic
Terrestrial broadcasting FM26%49%GovernmentGovernment
Uplinking of news and current affairs TV channels26%49%GovernmentGovernment
Uplinking of non-news and current affairs TV channels100%100%GovernmentAutomatic
Airports - existing projects100%100%Automatic up to 74%. Government route beyond 74%Automatic
Scheduled air transport service/domestic scheduled passenger airline49%100%Automatic Automatic up to 49%.Automatic up to 49%. Government route beyond 49%
Non-scheduled air transport service74% FDI (100% of NRIs)100%Government route between 49% and 74% Automatic up to 49%.Automatic
Ground handling services in civial aviation sector74%100%Government route between 49% and 74%Automatic
Satellites-establishment and operations74%100%GovernmentGovernment
Duty-free shops100%Automatic
Railway infrastructure100%Automatic
Asset reconstruction companies100% of paid-up capital of the company (FDI+FII/FPI)100%Automatic up to 49%. Government route beyond 49%.Automatic
Credit information companies74%100%AutomaticAutomatic
Insurance companies26%49%AutomaticAutomatic
White label ATM operations100%AutomaticAutomatic up to 49%.
Private security agencies49%74%GovernmentGovernment route beyond 49% and up to 74%.
Pharmaceuticals - brownfield100%100%GovernmentAutomatic route up to 74%. Government route beyond 74%.

Based on Consolidated FDI Policy (effective from April 17, 2014), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

Based on Consolidated FDI Policy (effective from June 7, 2016) and Press Note No. 5 (2016 Series) - “Review of FDI policy on Various Sectors”, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

Based on Consolidated FDI Policy (effective from April 17, 2014), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

Based on Consolidated FDI Policy (effective from June 7, 2016) and Press Note No. 5 (2016 Series) - “Review of FDI policy on Various Sectors”, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

4. The recent pickup in FDI flows to India compares favorably with developments in many countries in Asia. Net FDI inflows to India strengthened to 1.7 percent of GDP in fiscal year (FY) 2015/16, and are expected to remain strong this year in FY2016/17, supported by the opening of new sectors for foreign investment. FDI inflows have thus far been concentrated in a few sectors of the economy. Traditionally, most of the FDI equity flows (the majority of FDI flows to India) have been placed in the services sector (about 18 percent of all FDI equity inflows since April 2000). However, in the last two years, the computer sector has started to receive more inflows, more than doubling every year. On the flip side, recent weaknesses in the construction sector have led to a sharp moderation of FDI equity inflows into that sector. Since April 2000, one third of FDI equity inflows have come from Mauritius, benefiting from the 33-year old tax treaty between the two countries which allowed for a capital tax exemption to a Mauritius resident on transfer of Indian securities.2

FDI Inflows

(In percent of GDP)

Sources: IMF, World Economic Outlook; IMF staff estimates.

Figure 2.India: FDI Equity Flows

Source: Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

5. This gradual liberalization process has not been reflected in traditional indices of capital account openness. The major de jure indices (Chinn-Ito, Quinn) continue to show that India’s capital account is quite restrictive and the numerical values of these indices have not moved for a long period of time. This is partly because these traditional de jure indices do not separately measure controls on inflows and controls on outflows. Nonetheless, a recently-developed set of de jure indices (Fernandez et al 2015), which for the first time differentiates between controls on inflows and controls on outflows, demonstrates that India’s capital account inflows—most notably, inflows for commercial credits and derivatives— are more liberalized than those on its outflows. However, earlier research found that the effective controls in India are mostly on inflows (Bi, 2016), and controls on outflows are typically not binding. These de jure indices continue to have limitations, as some do not show the intensity of applied capital flow management measures, while others show only a very broad-based picture, not allowing for a differentiation of capital controls by type of flow.

Figure 3.Openness of the Capital Account

6. The impact of capital controls on capital flows appears to differ between inflows and outflows and among types of flows. Using 2014 capital flow data on more than 80 countries, capital controls (as measured by the de jure indices of Fernandez et al (2015) for 2013) have a larger effect on capital outflows than capital inflows. In addition, the impact of capital controls on FDI flows seem to be smaller than on some other types of capital flows. The earlier empirical research (Montiel and Reinhart, 1999) found that capital controls influence the composition of flows but not their volumes. Moreover, the impact of capital controls was found to change over time and across regions (Asiedu and Lien, 2003).

7. Capital account liberalization should be complemented by structural policies to attract stable, non-debt creating capital flows to India. Capital inflows are essential to support external sustainability in India given its deficit on the current account balance. Given differences in the impact of capital control measures on various types of capital flows, the pace and direction of Indian capital flow liberalization should be carefully assessed based on a cost-benefit analysis. Implementation of structural policies, including those to strengthen the financial sector and institutions, could increase the benefits of capital account liberalization for the recipient economy. Measures to improve the business environment, strengthen the financial sector, and develop financial markets, as recently adopted in India, should continue.

Figure 4.India: Capital Flows and Capital Controls

Sources: Fernandez et al (2015); IMF, Balance of Payments Statistics; IMF, International Financial Statistics; IMF, World Economic Outlook databases; World Bank, World Development Indicators database; Haver Analytics; CEIC Data Company Ltd.


    AsieduE. and D.Lien2003Capital Controls and Foreign Direct Investment,World Development Vol. 32 No. 3.

    BiR.2016How Open is India’s Capital Account? An Arbitrage-Based Approach,” Chapter 5 of India: Selected Issues IMF Country Report No. 16/76 (International Monetary Fund: Washington).

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    ChinnM.D. and H.Ito2006What Matters for Financial Development? Capital Controls, Institutions, and Interactions,Journal of Development Economics Vol. 81(1) pp. 163192. Updated as of June 2016.

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    FernandezA.KleinM.W.RebucciA.SchindlerM. and M.Uribe2015Capital Control Measures: A New Dataset,IMF Working Paper WP/15/80 (International Monetary Fund: Washington).

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    IMF2016Capital Flows—Review of Experience with the Institutional View,IMF Policy Paper (International Monetary Fund: Washington).

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    MontielP. and C.Reinhart1999Do Capital Controls and Macroeconomic Policies Influence the Volume and Composition of Capital Flows? Evidence from the 1990s,Journal of International Money and Finance Vol. 18 pp. 619635.

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    QuinnD.P and M.Toyoda2008Does Capital Account Liberalization Lead to Economic Growth?,Review of Financial Studies Vol. 21(3) pp. 14031449. Updated as of April 2013.

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Prepared by Svitlana Maslova.


A new tax agreement provides for a two-year transition period up to 31 March 2019, after which tax will be charged at full domestic tax rates. The change could also affect the size of capital inflows from Singapore, the importance of which has been rising in recent years, as capital gains tax exemption under the India-Singapore tax treaty depends on the India-Mauritius tax treaty.

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