NEW DELHI: In its annual Global Development Finance report, the World Bank said an expected increase in FDI to South Asia was strongly linked to the continuation of India's economic reforms. Releasing the report here, William Shaw, lead economist with the World Bank's development prospects group, however, warned a prolonged war in Iraq might adversely affect India's GDP growth and impact remittances. "India's GDP growth depends on the war's outcome. If the war continues for a long time and oil prices continue to rise, it could affect the country," he said. A World Bank statement said: "FDI to South Asia is expected to rise from $5 billion in 2002 to $9 billion in 2005, assuming the Indian reform programme and government's efforts to attract foreign investment continue." Noting that the 1990 Gulf War had not affected remittance flows to India, the report said remittances to South Asia were expected to rise and the "Iraq war may reduce remittance flows only slightly". Among developing countries, India was the highest recipient of remittances in 2001, receiving $10 billion. South Asia received $16 billion in remittances in 2002, with Bangladesh ($2.1 billion), Pakistan ($1.5 billion) and Sri Lanka ($1.1 billion) being the other major recipients. A proposal to grant dual citizenship to non-resident Indians was also expected to increase investment inflows and remittances by them, the statement said. The report noted equity flows to South Asia were expected to rise due to several other factors, including the easing of tensions between India and Pakistan, the progress made in restoring peace in Sri Lanka and higher corporate profits than in other regions. The report, however, said India's reported FDI inflows were understated as they did not include earnings invested by foreign investors, direct investments between investors and subsidiaries and investments by offshore and domestic venture-capital funds set up by foreigners. Including such flows, the statement said, would raise FDI from $2-3 billion currently reported to as much as $8 billion. The continued strength of India's domestic demand also propelled South Asia to gains of 4.9 percent, despite disruptions in regional conditions associated with continued tensions around Afghanistan and between India and Pakistan, the report said. India's inward remittances, the report said, also "more than offset" the loss of tax revenue. While the net fiscal loss associated with Indian immigration to the U.S. was estimated at 0.24 to 0.58 percent of Indian GDP in 2001, remittances during the same period amounted to at least 2.1 percent of GDP. The World Bank statement said foreign exchange reserves in South Asia had "risen (especially in India), and now equal eight times short-term debt and nearly 10 months of imports, the highest levels among the six geographical regions". The report also noted that Indian manufacturing had shown signs of an upturn and the "Bangalore-based international services sector has experienced less disruption in demand than hi-tech sectors elsewhere". In its global outlook, the report said FDI and migrant workers sending part of their paycheque back home have become more important sources of finance for developing countries than private lending. Net FDI slipped from a 1999 peak of $179 billion to $143 billion in 2002, but it remained the dominant source of external financing for developing countries. Across the world, workers' remittances reached $80 billion in 2002, up from $60 billion in 1998. "Some disruptions from military actions in Iraq, including a temporary rise in the oil price, are built into the forecasts, but no severe, lasting dislocations are assumed," the World Bank said. The short-term growth prospects for developing countries would continue to depend heavily on the outlook for high-income countries, which in turn will be influenced by geopolitical factors, it said. The increase in oil prices from $19 to $28 a barrel during 2002 would offset gains for oil importers in agricultural and metals prices.
Source: IANS