The Asian Development Bank (ADB) in its recent report has projected a GDP growth of 8.5% for India during the fiscal year 2010-11. This is in line with the Indian government's projections. In the same report, ADB has expressed concerns about the high inflation (currently at 8.5% in August) and appreciation of the "Rupee", the Indian currency.
There is no doubt that there is a surge in capital inflows into India. In general, emerging market shares have been performing at record levels compared to developed economies and there is abundant foreign direct investment (FDI) flow into India. While high inflation is definitely a concern (especially food inflation which remains at record levels - 16.44% for the week ended September 18,2010), I don't see the rupee appreciation, at the current levels, to be a great concern.
While the rupee has appreciated more than 11% in real terms between August 2009 and August 2010, most of the appreciation was due to more-than-normal weakening of the rupee during the early part of the year. This was due to the surge in investments in the US dollar, when investors were fleeing for safety due to uncertain economic conditions. But when we look at it from a multi-year perspective, the nominal appreciation of the rupee should be around 5%-7%, which I see as a positive factor.
Remember, only 15% - 20% of India's GDP is contributed by exports and around 60%-70% is contributed by consumer spending . Now, there is no doubt that some very crucial export areas remain which act as drivers of growth and income for many other non-export sectors of the economy. But I still think that the negative effect on these sectors due to rupee appreciation at current levels is bearable and any short-term negative effects in these sectors could be offset to a certain extent by providing incentives. But when looked from the other angle, a stronger rupee would help to diversify investments in the economy which in the longer run should be able to offset the negative impacts of rupee appreciation in certain export industries.
Also, if a major portion of the capital inflows result in real job creation, thereby fuelling consumer demand, then any resulting inflation could be tackled by standard monetary policy tools.
And if right investments are done, with correct monetary policies in place, then a stronger demand from the Indian consumers is actually a boon to the global economy. From a global macro-economic perspective, we need strong demand from the consumers in the emerging markets during the coming years to fill the vacuum left by the consumers in the developed economies.
All this being said, ADB is concerned about the over-appreciation of the rupee in the coming years. I still do not see any clear signs for that. If foreign investment policies are rightly structured supported by sound monetary and government policies, then a growth in the inflow of foreign money should be balanced by import demands from the Indian consumers in the coming years, apart from an improvement in the quality of exports - all of which I see as a good sign from a global perspective. There are very many global factors involved in this but assuming the current status-quo of global competitiveness of the countries remain, I don't see a reason to worry about the current trends in the appreciation of the rupee.
Source(s):
1. http://www.adb.org/Media/Articles/2010/13337-indian-development-outlooks/
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