Rising inflation signals need for foreign investment

Why the Manmohan Singh government must do more to attract foreign investors

Inflation is in the news again. It has been over 7% for a few months now, and is expected to stay there due to various reasons, not least the price of oil. Consumer price inflation is lower and was about 3.19% in July. This indicator too is expected to follow an upward trend for the next few months.

Based on studies conducted in OECD countries, it has been seen that a single percentage point rise in inflation can shave off as much as 2% off per capita income. Inflation has thus joined the monsoon, truckers’ strikes and the price of oil as an inhibitor of economic growth.

Tackling inflation by raising interest rates can dampen industrial growth and output. That leaves cutting excise taxes and other duties which the government has begun – but this too will be circumscribed by the government’s fiscal position. India’s combined fiscal deficit is already about 10% of GDP.

Increasing investment is an option, and India’s planning commission has estimated that investment levels have to go up to about 28% of GDP (from the current 23%) to sustain an economic growth rate of over 8% per annum. Tall order for a government that has the loony Left as dogmatic back-seat navigators.

Yet investment is the one variable that is not circumscribed by anything other than the government’s will to attract it. Foreign investors do not want to put all their eggs in the China basket and are looking out for alternative destinations. It was nice to see Dr Manmohan Singh speak at the NYSE. But the manner in which Suzuki was treated raises questions about the realities on the ground. Slowing economic growth itself is making investors less excited about India, and if the government keeps sending mixed signals, foreign investors are likely to lose both their patience and their appetite. India simply cannot afford that.

One thought on “Rising inflation signals need for foreign investment”

  1. Well nitin…. People like you and me can only feel exasperated when what needs to be done for the economy is staring at us in the face and Delhi continues to dally endlessly…. Inguess an apt analogy is the chagrin and desperation that the leftist Liberals in the US feel seeing bush steadily gain over Kerry as nov approaches.

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