How does foreign investment solve India's economic problems?

How does foreign investment solve India's economic problems?

Kaustubh Katdare
@thebigk

Updated: Oct 27, 2024

Views: 1.3K

First things first - I suck at Economics and Finance and try to make my own personal finance related decisions based on common sense. It's worked pretty well for me until now; but that does not mean I've any authority or knowledge on how economies work. That's why, I want to know and understand the answer to this simple question: How can foreign investment solve India's economic problems?

My common sense tells me that if India needs more money; it needs to boost its exports and grow internal business so that money stays in India and circulates within India. But, the government seems to be doing exactly the opposite. It's opening floodgates of foreign investments by relaxing FDI, allowing more foreign borrowing (WTF?) and so on.

The markets have responded negatively to all the steps taken by the RBI (which is basically controlled by the finance ministry).

I look forward to views and opinions from CEans.

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silverscorpion

Member • Jun 27, 2012

I'll try to answer this as best as I can.

Well, if we are self-sufficient, we need not depend on anyone else for our own progress. That is true for any field, be it education or self-improvement or agriculture, or in this case, national economy.

And sadly, we certainly are not self-sufficient. We need energy, lots of it. And we need a lot of oil too. We can't produce enough oil to satisfy our demand, so we 'buy' them from whoever is selling it. And they don't want rupees in exchange, they want dollars. Or Euros. Or whatever other currency they are trading in. So for paying them, we need to have reserves of foreign currency. This is called <a href="https://en.wikipedia.org/wiki/Foreign-exchange_reserves" target="_blank" rel="nofollow noopener noreferrer">Foreign Exchange Reserves</a> of the nation. This is very important, because without significant Forex reserves, a country cannot participate in international trade effectively. Too much of it is also bad, and that's another thing. But the point is, every country needs to have Forex reserves, and foreign investments is one way you can get foreign currency to your coffers. There are other ways like directly buying US treasury issued bonds et all.. But generally, I think this is why foreign investment is considered good for the economy.

By the way, some interesting links about this whole Forex thing,,

<a href="https://en.wikipedia.org/wiki/Reserve_currency" target="_blank" rel="nofollow noopener noreferrer">Reserve Currency</a>
<a href="https://en.wikipedia.org/wiki/Triffin_dilemma" target="_blank" rel="nofollow noopener noreferrer">Triffin Dilemma</a>

Of course, this is only based on my understanding of economics, which is quite low, as it is. There might be other reasons..

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Kaustubh Katdare

Administrator • Jun 27, 2012

Having foreign reserves is understood. The Oil reasoning is the most common I've heard. But isn't it quite obvious that India should work on strengthening its businesses so that they export more and get the dollar they want for the transactions? Borrowing and allowing people to invest doesn't even look like a wise option.

Any investor will invest when they're absolutely sure of positive returns. That in fact will damage Indian economy more!

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