India's decision to raise foreign direct investment caps on single and multibrand retailers prompted by need to shore up India's ailing economy; June-September quarter's year-over-year growth of 6.9% was slowest rate in two years

Allison Oesterle

Allison Oesterle

Dec 1, 2011 – Industry Intelligence

LOS ANGELES , November 30, 2011 () – The Indian cabinet’s controversial decision to raise caps on foreign direct investment in single-brand and multi-brand retailers to 100% and 51%, respectively, was prompted by the Indian government’s attempts to shore up India’s ailing economy, The Wall Street Journal reported on Nov. 30, 2011.

According to the article, growth during the June-September was only 6.9% higher than it had been during the same time last year, which is the slowest growth rate that India has experienced for the last two years.

In an effort to curb inflation, the Reserve Bank of India has increased the interest rate 13 times since March 2010. This has slowed growth and decreased borrowing, but has had little effect on India’s staggering inflation rate, which, based on wholesale prices, is hovering at nearly 10% a year.

The rupee, which is the worst performing Asian currency, has lost over 15% of its value against the American dollar.

Economic forecasts predict that economic growth next year will most likely fall to 6%, which will harm India’s banking industry.

India maintains a current-account deficient, meaning that its financial system is dependent upon foreign capital. India was hammered by the intensification of the eurozone crisis, which led global investors and lenders to withdraw their money from emerging markets such as India.

In order prevent an economic crisis and stimulate foreign investment, India’s ruling Congress party revived and passed measures that raised the FDI caps in single-brand and multi-brand retailers.

Analysts predict that the FDI reforms will take years to affect India’s economic health, and caution that may more reforms need to be implemented in order to alleviate India’s economic woes.

The primary source of this article is the Wall Street Journal, New York, New York, on Nov. 30, 2011.

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