How the American Dollar Impacts India

Topics: Foreign exchange market, United States dollar, India Pages: 9 (3636 words) Published: April 19, 2007
Fin 242
Financial Management

Term Paper

How the American dollar ($) impacts India, a general report

Samarth Bahl

Since, 1991 when the then Indian government was run by the Indian National Congress (INC), the political party instituted a plan to implement economic reforms, short and long term to bring the country out of its quagmire, to this end the value of the dollar has played a key role in the economic fortunes of India. This is due to the fact that the dollar has been the world's most dominant currency in the past 65 years. The major currencies in the market today are always measured against the dollar. For example, the value of the Euro, its strengthening or weakening is measured relative to the American dollar. The reason for the dollar to be such a strong market force in the foreign exchange market is due to its reserve currency status, which makes it the most widely distributed and used currency. That is another reason why some of the other major existing and potentially strong currencies are pegged against the dollar. Of course, the value of the dollar is not fixed it depends on various factors. Trade deficit, budget deficit, national debt, foreign investment returns are some of the major factors that play a critical role in determining the value on a continuing, daily basis. When economic reforms were introduced in India, they themselves did not realize that in the next decade the rate of economic growth in their own backyard will be unprecedented due to the untapped potential of its substantial middle class in terms of sheer volume. The economists in the country eventually gained on to the reality that the potential of the consumers was the stepping stone to India's economic freedom. The major factors that have worked in favor of the country are that the labor force is highly educated (and fluent in English) and skilled, yet is still cheap comparatively to the industrialized nations. So much so, that the multinational companies have outsourced jobs to India. These reasons have prompted China, India's direct competitor in economic terms not only in the region but worldwide, to institute programs to teach English to their working population. Most major international brands and corporate bigwigs such as Microsoft, Hewlett-Packard, Intel, General Electric, Pepsi, American Express, Morgan Stanley, Boeing and many more have outsourced and actually have their regional offices in India and also, in some cases have manufacturing plants. The emergence of the multinational businesses in India has brought much needed capital into India, which has helped the Indian government to expand its horizons in terms of being a key player in international politics, economics and policies. To the scope that India is recognized around the world for its prowess in the IT sector and it is fast emerging as the number one medical destination for patients. As a result unemployment has decreased and poverty has decreased by 10 percentage points. Consequently, India has seen higher standards of living in recent years and higher costs of living, especially in urban areas. Strong economic ties that are build on strong foundations has helped India to foster diplomatic, military, strategic alliances with United States. The Indian Diaspora has contributed in the thawing of relations of the two countries by contributing to the US economy. This in turn gives certain assurance that the USA will look to invest further in India's fortunes. 17.08 % of USA's foreign direct investment flows into India and covers almost every sector in India, which is open for private participants. This has given carte blanche to the Indian administrators to further their ambitious claims to overtake China as the number one emerging economic superpower. Further to this argument is the fact that India is primed for the next wave of investment boom, as they plan to free float the country's rupee as fully convertible. This might be a useful tactic, if the...

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