Safety in the storm – As the requirement for capital import into India at present is low, the global tornado has modest implications for us

Source: The post is based on an article “Safety in the storm – As the requirement for capital import into India at present is low, the global tornado has modest implications for us” published in Business Standard on 20^thMarch 2023.

Syllabus: GS 3 –Economy

Relevance: Reasons behind moderate investment and savings in India

News:Volatility in global financial markets has increased. However, the Indian economy has not been much affected by it because the requirement for capital import, i.e., the gap between investment and savings is modest.

What are the reasons behind modest investments and savings in India?

The aggregate domestic savings come down when there is a larger deficit. Therefore, changes in the deficit are modest due to which there is a moderate investment/savings gap in India.

Further, the weak pace of investment within India is within reach of the supply of savings in the economy. The requirement for foreign capital inflows is hence relatively small.

Moreover, even if the capital import need had been larger, the markets would still have supported it given the need for operating the accounting identity.

However, when the global financing environment is more stressed, Indian asset prices have to drop to a point where buying them looks attractive. 

There are two ways in which this can happen – a) Either the exchange rate can act as a shock absorber and cheaper Indian assets are achieved through INR depreciation or b) the authorities hold up the exchange rate and local asset prices drop to a point where they are sufficiently attractive to global investors.

Moreover, a combination of USD/INR adjustment and real estate price adjustment can also help in making the price fall for Indian real estate globally.

What can be done to prevent the impact of falling real estate on the Indian economy?

There is a need to have a large number of well-established Indian asset classes globally along with a diversified engagement with global finance, well-established information flows and middlemen operating in public and private equity, etc.

This would make disruptions in any one asset class to not pose a threat to the whole Indian macroeconomy because this would be compensated by making small devolution in rupee while making other asset classes more appealing.