FDI falls further

Foreign Direct Investment (FDI) dropped by a whopping 37 percent during the first half of the current fiscal year: from 2 billion dollars in July-December 2010 to 160 million dollars in July-December 2011. This data is unlikely to surprise anyone. There are a number of macroeconomic indicators whose performance clearly and unambiguously are responsible for the decline in the FDI, notable amongst which is the steadily declining rupee value. The average rupee-dollar parity between July-March 2009-10 was 83.56 rupees to the dollar which declined to 85.59 rupees to the dollar in the comparable period of 2010-11 fiscal year as per the Economic Survey 2010-11. By December 2011, the rupee-dollar parity had declined further to around 90 rupees to the dollar. Anyone seeking to invest in this country would, without doubt, take account of not only the rate of profit on the transaction but also the applicable exchange rate at the time he/she repatriates the profit that determines the real rate of return. It is necessary to look at the steady decline in the value of the rupee since 2007-08 when the Musharraf government adopted the economically unsustainable though considered at the time as politically astute policy of not passing on the massive increase in the international price of oil onto the consumers: the average rupee-dollar parity in 2006-07 was 60.6, in 2007-08 it was 62.5, in 2008-09 the parity was 78.4 and in 2009-10 it rose to 82.5. The eroding value of the rupee is attributable to the rising budget deficits and the increasing reliance of the government on borrowing - both from external sources as well as domestically. External budgetary support (programme lending) from multilateral and bilateral donors has ceased subsequent to the final suspension of the International Monetary Fund Stand-By Arrangement (SBA) in the third quarter of 2011-12. This has, in turn, led to a much greater reliance on domestic borrowing than envisaged in the budget for 2011-12 - reliance with serious implications on the value of the rupee directly, given that deficit financing is a highly inflationary policy, and indirectly through crowding out private sector borrowing with catastrophic implications for the Gross National Product. The onus of maintaining the external value of a currency resides with not only the State Bank, which has recently been engaged in appropriate interventions to arrest the rupee decline, but also the Ministry of Finance through its sustained flawed policies with respect to domestic borrowing that are being implemented by a subservient State Bank irrespective of its autonomy on paper. In addition, the ministry must also be held responsible for its continued failure to implement macroeconomic reforms (in the tax system, the energy sector and in making appointments on merit in state-owned entities) that are required to stem the erosion of the rupee. An eroding rupee is certainly not the responsibility of the Interior Minister, who recently accused private foreign exchange companies of deliberately manipulating the rupee value to enhance their profits and, true to form, followed this accusation with threats of dire consequences. While no doubt the Interior Minister does understand the principles of currency trading, yet his refusal to take his cue from those who are more knowledgeable than him on matters economic must surely continue to embarrass the economic team. Be that as it may, there has been a significant increase in remittances through the legal banking channels attributed to State Bank policy, the historically low interest rates in the West, and what many admit is the action by Interior Minister against those engaged in hawala/hundi process. However at the end of the day, it is necessary to acknowledge that the hawala system will continue till such a time as the general public begins to have confidence in the legal as opposed to illegal money transfers. In short, threat of legal action is not sufficient to deter illegal activity. The system must provide appropriate mechanisms to generate an environment whereby there are no customers for the illegal activity - which unfortunately the economic team has been unable to provide. Copyright Business Recorder, 2012