Alas, There is no Free Lunch
Recently, the Finance Minister said the investment boom was leading to large trade deficit and he wants to cure it by opening the floodgates of foreign investment. But the minister got it exactly wrong: if increased foreign investment is to finance the domestic investment, the current account deficit MUST rise! It is simply a matter of understanding the savings-investment and balance-of-payments identities.
Raising investment without lowering fiscal deficit is not sustainable in the long run unless we get lucky and households decide to increase their savings in a big way.
A common misconception among policy makers and analysts is that trade deficit can be cured by increased foreign investment. According to one report, even the finance minister seems to have suggested this prescription for India’s rising trade deficit (‘FM to open FDI floodgates to keep trade deficit in check,’ ET May 23, 2005).
Interestingly, however, the correct relationship is just the other way around: an increase in foreign investment increases trade deficit. (‘FM to open FDI floodgates to keep trade deficit in check,’ ET May 23, 2005).
Interestingly, however, the correct relationship is just the other way around: an increase in foreign investment increases trade deficit.
Interestingly, however, the correct relationship is just the other way around: an increase in foreign investment increases trade deficit. (‘FM to open FDI floodgates to keep trade deficit in check,’ ET May 23, 2005).
Interestingly, however, the correct relationship is just the other way around: an increase in foreign investment increases trade deficit.