Audio podcast: The flight of capital from India

Ashraf Engineer

June 4, 2022


Hello and welcome to All Indians Matter. I am Ashraf Engineer.

Reserve Bank of India data tells us that India’s capital account has been negative over the past three years. In layman’s terms, it means that the amount of capital coming into the country is less than what is going out. This is worrying and requires urgent corrective action. Why? Because the flight of capital makes India poorer and it means that there is less for critical spending on things like schools and infrastructure.


The selloff by foreign institutional investors, or FIIs, from the stock markets this year has affected economic sentiment deeply. In 2022, foreign investors have pulled out Rs 1.5 lakh crore from Indian markets, across stocks, debt and hybrid assets. This selloff is an aggressive one.

January -₹28,526 crore
February -₹38,068 crore
March -₹50,067 crore
April -₹22,688 crore
May At least -₹11,394 crore
Total -₹1.50 lakh crore

FIIs are the largest investors in emerging markets and have access to vast volumes of capital. A selloff by them is seen as indicative of the economy’s overall state, the lack of confidence in it and it scares other investors.

There has been some steadying of the ship by domestic institutional investors like insurance companies, and mutual, pension and provident funds but even those systematic investment plan, better known as SIP, inflows fell in April. The risk appetite just isn’t what it used to be.

One of the primary reasons for FIIs pulling out their money has been the US Federal Reserve raising interest rates to control inflation caused by supply chain disruptions due to the Russian invasion of Ukraine, the lingering effects of COVID-19 and the resultant slowdown.

How does the rise in US interest rates result in FIIs pulling out money in India? The rate hike prompts them to take money out of emerging markets and invest it in secure instruments like US debt funds.

The market is spooked because high inflation threatens to take a chunk out of corporate profits and hit the brakes on consumer spending. With the global economy shaky at best and the rupee getting weaker, there isn’t much to bolster foreign investors’ confidence.

Another manifestation of this lack of confidence is the exit of foreign companies from India. The latest high-profile exit is that of Holcim, the Switzerland-based cement conglomerate, which is selling its stake Ambuja Cement and ACC to the Adani Group for a deal valued at $10.35 billion or Rs 79,238 crore – the biggest MNC exit ever from India.

The fact is that global conglomerates see a large market like India and their eyes light up. Then they come here and have to deal with the realities of India: illogical tax structures and high tax rates, labour trouble, a less than optimal regulatory environment… I could go on. Finally, after years of trying, they pack their bags and leave.

Several such MNCs have left over the past few years. Think Ford, General Motors, Harley Davidson, MAN Truck and Bus, Telenor, Etisalat, Cairn, Royal Bank of Scotland, Fidelity Mutual Fund, Barclays Plc, Morgan Stanley and Citibank, which is selling its consumer banking business to Axis Bank.

These represent large amounts of money that will exit India – billions of dollars. Remember, this is at a time when the economy is navigating very choppy waters and the loss of jobs is alarming. According to an Oxfam report, 4.6 crore Indians slipped into extreme poverty in 2020, accounting for nearly half of the global ‘new poor’. In 2021, 84% of Indian households suffered a decline in income. This is people like you and me. Compare this with what happened to the ultra rich: the collective wealth of India’s 100 richest people hit Rs 57.3 lakh crore or $771 billion.

The common people, meanwhile, struggle to pay their bills and put food on the table. Millions of children have had to shift from private schools to government-run ones – four million in 2021, according to one estimate. No less an institution than the RBI said India will take 13 years to make up the losses incurred due to the COVID-19 pandemic.

There are, of course, various reasons for the flight of capital. An article in the Journal of Indian Association of Social Science Institutions cites corruption, which raises the cost of doing business, and the increase in government debt. The latter means that when the government borrows more money, interest rates rise for everyone seeking debt to start or finance their own businesses.

If India’s economy is not competitive, capital will look for a home elsewhere.

There is also the critical issue of social conflict, which is on the rise in an India ruled by the Bharatiya Janata Party – which believes in a Hindu rashtra and under whose rule attacks on minorities, lower castes and other vulnerable groups have increased. Today, the social atmosphere is deterring many foreign investors.

It’s this coming together of various reasons that should worry all of us and which has led to the flight of capital from India. As I said, the same amount could have been invested in new plants, on infrastructure projects, or in setting up schools or colleges, thereby creating more employment opportunities and growth.

Thank you all for listening. Please visit for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at Catch you again soon.