British High Commission New Delhi
India is taking action to stabilise its depreciating currency. The latest steps restrict outward investment by Indian businesses and individuals. Finance Minister Chidambaram underlines that these capital controls are temporary. India’s good long term economic potential has not changed. Nor will it roll back the last twenty years of economic liberalisation. But the latest measures could lower Indian investment into the UK, at least in the short term.
The last few weeks have seen a rapid depreciation of the rupee. On 14 August the RBI introduced controls designed to stem the outflow of capital. The limit for new Overseas Direct Investments without prior approval was cut from 400% of the net worth of an Indian company to 100%, and the annual limit for overseas remittances by resident individuals was cut to $75,000 from $200,000. Under the new rules, resident individuals cannot use this to purchase immovable property abroad.
These capital controls target Indian and not international firms. The government paired them with measures to encourage foreign capital inflows. Multinational companies can now fund Indian subsidiaries directly. In a related move, the government has launched a consultation to clarify and rationalise transfer pricing rules, which have long been contentious.
Finance Minister Chidambaram also announced new measures to control the current account deficit, including increased import duty on gold and silver. He promised to limit the deficit to 3.7% of GDP in 2013-14, down from 4.8% last year.
So far, attempts to stabilise the rupee have not been successful. There are likely to be further falls in stocks and foreign exchange as markets internalise the full implications. Beyond that the picture is less clear – with exports ticking up and the current account deficit likely to improve, there is limited rationale for further significant falls in the rupee.
What Does This Mean For The Indian Economy?
Reports of a return to the currency crisis of 1991 or the end of liberalisation, remain greatly exaggerated. The key decision-makers know that the only way to get back to the sustained high growth of a few years ago is to open up India’s economy and press on with market reforms. A lower value for the rupee may have benefits – it makes investing in India cheaper, lowers the bar for the large external investment required in India’s infrastructure and should boost export competitiveness.
Implications For The UK?
The new measures could reduce major new Indian investments, at least for the next few months. Big firms have significant cash balances, so will still have some flexibility to invest. Indians have also been among the biggest investors in London property over the last few years: the ban on overseas property acquisition may put future plans on hold.
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