India pocketed most FDI in '06: World Bank

India attracted a major chunk of the record $40.1 billion capital that flowed into South Asia in 2006, but restrictive policies could stunt investment growth leading to slower economic expansion, the World Bank warned in a report.

"Much of the foreign direct investment inflows into India were concentrated in the services sector, telecommunications in particular, in response to liberalisation policies...such as easing ownership restrictions," the Bank said in its Global Development Finance Report of 2007.

"...but its (India's) restrictive policy conditions are expected to lead to deceleration in investment growth and weaker private consumption and government spending, contributing to a slowdown in gross domestic product growth to 7.8 per cent and 7.5 per cent in 2008 and 2009, respectively," it said.

India's GDP grew by 9.2 per cent in 2006-07, although signs of slowing appeared at the end of the fiscal. Total FDI inflows last fiscal (April'06-March'07) was $15.7 billion.

The Bank said net capital inflows to South Asia increased to $40.1 billion in calendar year 2006, up from $28.3 billion in 2005 with strong capital inflows largely due to a $12 billion expansion in net private debt flows.

Net equity inflows to the region, however, increased only slightly as a $3 billion increase in FDI was partly offset by a decline in portfolio equity flows, the report said.

The Bank also said that FDI outflows from India was on the rise due to increasing cross-border M&A purchases by Indian companies, mainly in high-income economies.

Since 2004, FDI flows from India to the UK exceeded flows from the UK to India, said the report, which factored in Indian multinational Tata's over $12 billion acquisition of Anglo-Dutch steel company Corus early this year.