Why FDI alone will not help Indian Economy or Falling Rupee?

Who will be investing via FDI in India? Are they some foreign charity organizations or are they foreign businesses? And if its a business, don’t they expect to make at least $101 if they invest $100 as FDI in Indian economy?

Why will a company invest in the Indian economy or for that matter in any economy? If they find a market for their products and services, or if they find a cheaper work force or talent pool to manufacture or support their products and services.

So if an american IT company opens shop in India, it means they can hire software professionals at a fraction of cost of hiring similar professionals in America. They can thus save money. Or if a Korean smart phone company enters India, it means they have seen a large market potential to sell their products in India.

Yes, an open economy with good economic policies and large market will obviously attract FDI, which in turn will create jobs, bring in foreign exchange, boost the economy and so on. But is dependence on FDI alone sustainable in the long run?

No, it will only make our economy more interlinked to the economic health in the parent countries of companies investing via FDI in India.

When US economy went for a toss during the SubPrime Crisis, the US companies pulled out their FDI money from India. Our economy started going for a toss as well. This is what happens if you rely on FDI, and then end up blaming global economy for being “in a bad shape”. The same happened again which led to the recent fall of Rupee. FDI investors who had invested in India started losing confidence in the Indian market, and started pulling out their dollars from the Indian economy, which caused Indian Rupee to start falling with the demand for dollar increasing, and that of Rupee decreasing.

Its been months since government opened up Retail for FDI, and not a single dollar has come in yet! Why?

On the other hand, if you grow industries at home, promote agriculture, manufacturing, innovation, products, and create an export oriented economy, then such an economy will be lot more stable than a solely FDI based economy. And unlike FDI, in an export oriented economy, you will be earning the dollars on your own, rather than taking soft loans in the name of FDI. Innovation should be the keyword where in we create products and services which are unique and have a high market value. US economy earns back a lot of it spends buying thousands of goods and services by just selling Boeing Planes and defense equipment to other countries.

Of course you cannot export if the foreign markets are down and arent importing much, but at least when that happens you already own your foreign exchange you earned through past exports, and dont have to fear foreign companies who had invested via FDI earlier sucking out all their dollars and taking your Rupee for a ride, causing your economy to go down with theirs. To summarize you will have enough breathing space and time to act and set your house back in order.

In fact, if India aggressively promotes a strong agriculture and exporting agro products, our economy will almost never go for a toss, because no matter how weak the world economy might be, countries will always require more and more agricultural products with ever increasing population and decreasing farmlands.

Strengthening the falling Rupee

The Indian Rupee is a free floating currency, which means we have allowed the market to decide its exchange rate or its value.

This being the case, if the Rupee starts falling, it means that the market is losing confidence in Rupee or is not finding Rupee an attractive investment.

And then if RBI is entering the market to try and bring up the value of Rupee, all it means is RBI is going “against” the market mood. I see absolutely no use from this artificial intervention by RBI to strengthen rupee because it is ONLY a temporary measure, RBI cant do it forever. Intervening to correct temporary market moods is something totally different from intervening to save a falling Rupee caused by bad economic policies. The right treatment is to re-establish good economic policies.

All RBI can do is either release more dollars draining the valuable foreign exchange, to make dollar artificially weaker against Rupee temporarily due to more supply, or it can suck in Rupee from the local market either by hiking interest rates or by issuing bonds which will temporarily strengthen the Rupee against dollar because of restricted supply of Rupee in the market. But this is never a long term solution because you cant keep releasing more dollars just like that into the market, nor can you keep absorbing more Rupee from the market.

The true solution is to create economic conditions and policies which will allow Rupee to be strengthened on its own in the market. The long term solution is to build manufacturing, products, agriculture industries and create a healthy exported oriented economy, and Rupee will automatically be strengthened without the need for any intervention.

Building a strong economy is not some Rocket Science, but then there are no quick fixes either.

  • Pras

    Clear Vision. India need strong Agricultural Economy.

  • Raj Saraswat

    Guruji i just want to know, Why our govt always promot private firms and always prefer privatization ??? Is it that our govt has a doubt on the credibility of govt employees. Most of the govt firms has added pvt ltd. in their name and some firm merge with other govt firms. can’t our govt. think of staring new firms in all sectors and create job. Till when we have to depend on Google, TCS, Voith, Seimens, LNT…etc for the job. Where as there is no issue of money we have 3rd largest economy in the world.

    Please do reply

    • itzguru

      The reason behind many govt firms failing is due to lack of accountability and guaranteed jobs. There is no concept of layoffs in government jobs, once you get a job you will have it till you retire, and on top of that so many benefits. Even your seniors cannot remove you from your job. So juniors dont give a damn to their seniors. Since there is no accountability, employees become idle, greedy, dont do much work, on top of that there are those who got the job through reservations, bribing etc. So even these people wont work to their full potential. The result is companies without productivity, running into losses, and govt ultimately sells them to private companies unable to run these companies.

      As for creating companies like Google, it cant be done by govt, nor is it government’s job to build companies. It has to come through private individuals in the form of innovation.

  • Sainath

    your views on this Gurudev ???

    • itzguru

      it sounds ideal but practically not possible, exports need not mean “only essential items”, exports can be anything you are good at, your geography and people are good at producing. Except for Petroleum all large countries can almost always be self dependent on “essential” items. But smaller countries almost always have to import a lot of what is not available in their geography. Take countries like Singapore, how can they be self dependent on all “essentials”? There is simply not enough space or labor available for that. So exports and imports will always be there. But for large countries to be dependent on imports is never a good idea, nor a good economy.

  • Jithendra

    Yes Guru as you said in your comments our government had spent needlessly in the name of donations to other crisis hit countries rather than taking care of its own countries health.
    I hope that the new non-UPA government which gets formed in next term will invest in internal industries and agriculture.

  • swagatika

    hi guruji, when i was a child or around 7 yrs i heared the economics crisis of india in 1991. i didn,t know what is that. i only heared it due to manmohan singh the econmics crisis saved. when i grew manmohan singh is best finance minister of india also heared. but in last two year i came to know that people are so full who gave such word. for me this was the not solution of that economics crisis. it was just temporarly solution for that problem. that is the reason today CAD is so high that rupee fall below 60 rs.but this govt still dependent only on foreign. more FDI will come more economic crisis will happen. it just a temporarly solution. may be with in 1 yr rupee will gain to 50 but it can easily touch 100 marks also. the only solution is encourage the micro and small scale industry so that country will solely depend on own production. rather than only depend on export oriented business they shoud focus in production+sufficient+export oriented business.. then dollar will fall below rupee.

    • itzguru

      It was PV Narasimha Rao who actually bailed out India of that severe economic crisis. He only got it done through ManMohan Singh whom he appointed as the PM. India then had to pledge more than 50 tonnes of Gold with IMF to get the bailout package and agree to n different conditions! What a humiliation. And compare this act with India giving unconditional 10 billion dollars recently to bailout European countries facing economic crisis. Why did our govt had to give that much money especially when our economy itself is facing problems!

      Yes, only an export oriented, innovation oriented economy can make us a big power and build a strong economy and a strong currency. All these FDI stuff are just jokes.