New Delhi, Nov 5 (SocialNews.XYZ) Investments in data centres and new trade agreements may initially increase imports and widen the trade deficit, but this need not weaken the rupee if they are financed by foreign capital and lead to future export growth, a report said on Thursday.
The report from HSBC Global Investment Research said India's emerging data centre boom and expanding network of trade agreements could improve the country's medium-term growth and balance-of-payments prospects without necessarily weakening the rupee.
"A low current account deficit isn't automatically a sign of strength, nor is a wider deficit necessarily a sign of stress. What matters is how the deficit is financed and whether it reflects investment in tradeable sectors,” the report said.
The report highlighted the rapid expansion of India's data centre sector, noting that around $70 billion of investment is already underway, with a further $90 billion of announced projects in the pipeline.
It also stressed the “importance of looking beyond the current account deficit, towards capital inflows, and outline conditions under which data centres and trade agreements remain rupee-friendly.”
In the short term, however, imports of advanced chips, servers, cooling systems and electrical equipment could add significantly to the goods trade deficit. The report estimated that around 75 per cent of data centre build-out costs are imports.
India should examine whether imports are capital or intermediate goods that eventually expand manufacturing and export capacity, similar to China, it added.
Vietnam had earlier demonstrated that imports can rise first, but if it reflects investment in export sectors, FDI and stronger exports follow.
The investment can be rupee friendly if India sees a staggered investment cycle like Malaysia. “Even as imports rise to fund a new centre, an older data centre investment may have started giving pay-off by then in the form of higher services exports,” the report explained.
Greater reliance on foreign capital (ECBs, debt securities and FDI), similar to Thailand’s case, has to cover the large import bill, the report noted.
—IANS
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Source: IANS
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