FDI as foundation

Prime Minister Manmohan Singh is a master in gentle persuasion. He has just observed that the Left are 8220;reasonable people8221; who will come around to accepting policies that are helpful for economic growth. He puts it this way: higher growth needs higher investment. Since 2001, India8217;s investment rate 8212; the ratio of investment to GDP 8212; has been lower than its savings rate, the share of national income that people save. This is an absurd situation for a developing country with a capital scarce economy. We want to import capital, not export it. The difference between the higher savings rate and the lower investment rate is reflected in the current account surplus and large reserves. As Singh has said earlier, the country needs to move from a current account surplus to a current account deficit.

The suggestions from the government about using forex reserves for infrastructure are also based on the same logic. In fact, the suggestion takes the argument a step further. It says foreign exchange reserves, now held in internationally liquid assets such as US treasury bills, or the amount we have loaned to the US and OECD countries, should be drawn down. In other words, not only should India stop exporting capital further, even the amount that we have lent to the rich countries should be reduced. The NDA policy of accumulating forex reserves has already seen a turnaround since the UPA took over. A current account deficit can be achieved by an appreciation of the rupee. A stronger rupee will also help in curbing inflation.

If the investment rate is to be stepped up and capital to be imported, the relevant question is what is the kind of foreign capital we want 8212; FDI, FII, commercial loans or official lending? The category of foreign investment that has been seen to be most beneficial to the process of growth, that comes with technology, raises competition, and develops a long term interest in the economic growth of a country is FDI, the preferred vehicle of foreign capital of the Communist Party of China. The infallibility of the logic of why FDI is crucial for India8217;s economic growth is perhaps the reason for Singh8217;s optimism. It remains to be seen how reasonable the Left really is.