Sunday Interview: I don't see any serious threat to Indian currency from Brexit'

In an interview to Pawan S. Bali, Nagesh Kumar, an economist who currently heads the South and South-West Asia office of the UN Economic and Social Commission for Asia and the Pacific (ESCAP), says the recent announcement of liberalising FDI reforms in nine sectors will make India an attractive destination for investors and that Brexit will have an implication for business houses. The views expressed are personal.

How do you see the prospects of FDI inflows to India?

The just launched World Investment Report 2016 of the United Nations Conference on Trade and Development (UNCTAD), has shown that FDI inflows to India increased by 28 per cent in 2015. The early trends from the first four months of this year showed that the increase was continuing with a sharp rise in greenfield FDI announcements, perhaps responding to policy reforms announced in November 2015, when 15 sectors were opened up. All these liberalisations of FDI regime make Indian economy more attractive for foreign companies to set up production bases here and contribute to “Make in India”. India is among the most attractive destinations for FDI flows. The World Investment Report puts it at the fourth place in developing Asia after Hong Kong, China and Singapore. The recent liberalisation announced on June 20 opening up nine more sectors to FDI will boost the country’s attractiveness further.

Will FDI flows to India increase due to the slowdown in China?

China has been a big and important magnet of FDI for many years as the most competitive manufacturing hub. But overtime some of its advantages have begun to erode. The wages have started to rise and the exchange rate has appreciated overtime. China is now trying to move up the value chain — for instance becoming a major production base for machinery, electronics and telecom equipment, including mobile phones. The lower-end of the industry that tends to be labour-intensive is being phased out to other countries. This would be good for India as it has to create productive jobs for 12 million people who join the workforce every year. If jobs are not created for these young entrants it will be a waste. So India needs to take advantage of the opportunity of diminishing edge of China in these industries through FDI and domestic investments.

There is a view that foreign investment may be impacted by Raghuram Rajan’s exit from the Reserve Bank of India?

Any investor coming to India is here because of the business prospects that the Indian economy offers. There is a unanimous view about the Indian economy’s ability to sustain robust growth rates and move up on higher trajectory even in the context of a global slowdown. It is, of course, helpful if there are people who are internationally respected and can articulate the strengths of the economy but there are many competent people in India. I am sure that an equally competent person will be appointed to carry on the good work done by Dr Rajan.

How do you see Brexit impacting the world economy, and the Indian economy in particular?

There will be an impact but it will pan out gradually, it will not be a dramatic one. This is because a whole lot of processes are involved in this exit and many laws will have to be amended. Some of the processes and rules will remain for some time. In fact, there are many countries like Switzerland that are outside the EU but have arrangements with it to have access to the European market and vice-versa. An immediate impact will be the pound going down vis-à-vis the dollar. Businesses that have exposure to the EU and the UK will have to re-configure their business models because many companies were using the UK as a sort of hub for European operations. Now they will have to see how they service the EU.

How will foreign investors, especially FIIs, react to Brexit? Do you see the Indian currency threatened by it?

Some FIIs could take a flight to safety from emerging markets. In any case, FII flows have been very volatile of late. So a major economy like the UK coming out of the EU will have certain implications for the funds flow. But India may be relatively insulated due to its better macro-fundamentals. India also has substantial foreign currency reserves to protect its currency against any destabilisation. So I don’t see any serious threat to Indian currency. The impact on India is more in the form of implication for business houses having exposure to the eurozone and UK markets.

Do Brexit and the rise of conservative parties across Europe signal that we will see more protectionist measures going forward?

There is certainly a threat of rise in protectionism. A recent WTO report for G20 finance ministers showed that protectionist tendencies were rising. When there is a slowdown and the outlook is not very bright, the recourse to defensive strategies tends to rise which results in rising protectionism. The rise of mega trade blocks like Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) in a part of the defensive strategy to consolidate access to markets on a preferential basis. But again one does not expect a dramatic rise in protectionism. There is an increasing trend but not a dramatic break from the past.

Indian exports have been down for some time now. Do you see any chance of improvement?

Exports have been down for more than a year but successive rates of decline have been falling and may have turned a corner. One might see exports stabilising and grow gradually from now on. But for sustaining export growth, exchange rate management is very important. The value of the rupee needs to be maintained in a competitive manner.

What do you mean by that?

It only means that the currency is not allowed to appreciate in real terms vis-à-vis other trade partners. Currency appreciation in real terms erodes the competitiveness of exports.

What can be done to further strengthen the investment climate in India?

The government is taking a number of steps to improve the investment climate. A key issue for investment is fixing the infrastructure gaps. This calls for boosting public investment in a very big manner.

There is a view that for this to happen India should allow fiscal deficit to grow…

While it is very important to keep an eye on the fiscal deficit, it is also equally important to focus on the quality of deficit. A slightly higher deficit through enhanced public investments that strengthen the capacity and productivity of the country may be acceptable. It can go a long way to revive the investment cycle and could be highly rewarding in the current scenario of slowdown of the world economy. So, in the short term, a slight deviation from the deficit target may be desirable.