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? They will do so only if they find a market for their products and services. Or if they find a cheaper work force or talent pool to manufacture their products or to support their services.
The reason for Foreign Investment
So if an American IT company opens shop in India, it means they can hire software professionals at a fraction of the 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.
Economic crisis when foreign investors withdraw investment due to their local crisis
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?
Nurture exports and innovation for a strong economy
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 more than it spends buying goods and services from other countries, by just selling planes and defense equipment to other countries.
Of course you cannot export if the foreign markets are down and aren’t importing much, but at least when that happens you already own your foreign exchange you earned through past exports, and don’t 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 agricultural 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.