FDI panacea

FDI panacea

The Indian economy has not been in the pink of health for some time now. The economic growth rate has showed down, general inflationary trend has assumed alarming proportions, the stock market is in a prolonged phase of downturn, foreign investment flows have hit a low, the country’s the oil import bill has been shooting up and, worse, government finances are in poor condition.

The common man is paying a heavy price as the rupee’s purchasing power has fallen in the face of high rate of general and food inflation. To avert a deeper crisis, the one thing that should not be happening at all in these circumstances is the currency exchange rate erosion vis-a-vis the US dollar. That, however, is not the case in reality. The rupee has suffered almost 15 per cent devaluation in dollar terms over the past few months, half of which has happened in recent weeks and days.

We are told that the rupee’s unprecedented fall is a result of the raging financial crisis over the Eurozone that has allowed the euro to lose value against the dollar. Why should the Eurozone crisis hit India so badly? And, among the currencies of leading developing economies, it is only the rupee that is experiencing severe exchange rate erosion. One might be tempted to ask if deeper integration with the Western economies is sucking the Indian economy into the myriad problems they currently face.

This may not necessarily be the case. Almost all currencies of the developing world have maintained their ground — the Chinese Yuan has actually become stronger against the dollar in recent weeks.

Union finance minister Pranab Mukherjee and RBI governor D Subbarao have suggested that their ability to intervene by releasing the dollar to meet demand is limited – the RBI doesn’t hold dollars in huge amounts. But the government can take steps to attract dollar inflows in the form of foreign direct investment. Nothing concrete has been done in recent months in this regard.

Some big-time foreign investment-generating market reforms have been in the pipeline for quite some time, but they are yet to arrive, as the Manmohan Singh government is preoccupied with political battles on the home front. The only investments that have come – and gone -- were in the stock market. In the last few weeks, foreign investors have withdrawn almost half-a-billion dollars from the stock market. The government may not have many options other than considering taking quick decisions to attract foreign investments afresh to stabilise the rupee.