‘Problem Of Plenty’ Awaits The New Government

The positivity and fanfare around the Modi-led government taking shape at the centre has already proved beneficial for the country as foreign inflows into the nation country is expected to be doubled during FY15 to about USD 60 billion. This will be more than 100% rise over the last year figure of USD 29 billion. This is certainly a great positive for the otherwise stressed Indian economy but it also poses different kind of threat for us, which would be a problem of plenty. 

A recent study of Assocham clearly shows that foreign investors are overly positive for India and pumping huge amount of money since the start of this fiscal, on the heels of Modi taking the rein of the country. Study marked that global investors are gung ho over the present situation and investment during current fiscal can clearly surpass the all time best figure achieved during FY13 of USD 46.17 billion. As per the study, during FY13 investment included FIIs inflow of USD 27.58 billion, while FDI was at USD 19.83 billon, but now FDI may inch up more to USD 25 billion, whereas FII still would lead the show at USD 35 billion. “If the Modi Government is able to take some reform friendly measures along with taming inflation and earning goodwill of the people, the FDI will do a fast catch-up with the FIIs. Typically, since the FDIs are long-term commitments, there would be a lag,” the paper noted. 

Though this situation seems quite robust, there are few big challenges attached to it. Due to this resurgent confidence of overseas investors huge money is all set to enter Indian economy that will pose problem of plenty for the RBI. As per the paper, the current situation on one hand puts pressure on the health of rupee and on the other hand it will fuel inflation more due to increased amount of liquidity. “New Finance Minister and the RBI thus, will have to be on the same page in dealing with this scenario which will see strengthening of Rupee and a further improvement on the current account balance. However, the ‘problem of plenty’ will force RBI to sterilise the inflows by injecting cash into the system,” marked the paper. 

To neutralize this situation Assocham has suggested import duty cut on the gold import so that a great amount of liquidity can go into it and also it will be looked at as people friendly decision. Paper also pointed towards the challenge of lowering interest rates along with taming inflation at the same time.