FDI: Letters & spirit

on the agenda. Currently the investment rate in the Indian economy is barely 25 per cent of GDP. The investment to GDP ratio must be raised to 30 to 32 per cent to achieve high growth. Since the domestic savings ratio is below this, foreign capital inflows are necessary.

There are presently two main obstacles to attracting foreign capital. The first is the policy environment. Outdated rules like Press Note 18 clearly discourage foreign companies from investing in India. Ceilings on FDI/FII also act as constraints. Most importantly, regulatory weaknesses make foreign investors hesitant. The experience of the telecom sector proves that when the regulatory framework is improved, FDI comes in. To attract FDI to infrastructure — power, airports and railways — which Singh says is needed, the first job of the government, as he correctly points out, is to create a transparent and independent regulatory framework. If the government is successful in doing so, over half the battle is won.

Second, is the issue of the currency policy. Simple macroeconomics tells us that for a country to have a domestic investment rate higher than its domestic saving rate, it must run a current account deficit and imports should exceed exports. However, India has been pushing exports to the extent that we have been running current account surpluses in recent times. We have been exporting capital, rather than importing it. Our domestic saving rate is higher than the investment rate, a completely ridiculous situation for a developing country that wishes to step up its investment levels. This has been done by preventing the rupee from appreciating. RBI was buying up the capital flowing into the country and investing it in US treasury bills. If foreign investment comes into India in response to better policies of the government, it will put pressure on the rupee to appreciate. An appreciation of the rupee will achieve a current account deficit. The government needs to make sure that the RBI clearly understands this. The long term growth objective of the economy should not be sacrificed at the altar of currency stability. The prime minister needs to make sure that both the regulators and the RBI are with him on the agenda of attracting FDI to raise growth.