India’s Currency Attracts Investors, but Damages Exports.

COIMBATORE, India   As talk of currency battles rumble through the global economy, India has been a reluctant warrior.

The reasons are evident here in Coimbatore, a southern city long known as a capital of India’s textile industry, an old-line export trade. Recently, demolition crews razed an abandoned textile mill to make way for the Alliance Mall.

From the ashes of an export industry rises a temple to foreign investment and local consumption. And it is all in keeping with India’s approach to a rising currency.

The Indian rupee is soaring — up 9 percent against the dollar in the last 16 months. That has taken a toll on exports like textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.

But instead of fighting currency appreciation, as Brazil and some other countries have done, India has been willing to let the rupee rise — for now, at least.

India is simply too hungry for the foreign capital that is drawn to the strong rupee and is driving it higher, because that influx of money is helping support this country’s approach to developing a modern consumer economy.

The Alliance project, with more than a million square feet of retail space, a hotel, offices and condominiums, is being built by an Indian developer with financing from a British retail company and a South African investment firm.

Meanwhile, the foreign carmakers Volkswagen and Nissan have started their first dealerships, hoping to capitalize on the growing consumer class in this city of about 1.5 million people.

The clear losers of India’s currency approach right now are garment makers. From April to August, exports were down 6.4 percent from a year earlier in the $10 billion Indian clothing industry. Although it represents only about 1 percent of the nation’s economy, the garment industry is India’s largest employer after agriculture.

“All the other countries are protecting their currencies, so why are we not?” said Premal Udani, chairman of India’s Apparel Export Promotion Council.

Indian policy makers are eager enough for foreign investment that, for now at least, they are willing to endure the damage a stronger rupee inflicts on exports, especially for lower-value goods like clothes. Exports of other Indian goods and services, like software and pharmaceuticals, have not been as hard hit because they are not as price-sensitive.

India also places a premium on the higher-value jobs that are fueled by foreign investment. Not far from where that old textile mill once stood, the German engineering company Bosch and the American software concern Perot Systems have opened offices in a new technology park.

The influx of capital has helped fuel a nearly 9 percent annual growth rate for India’s economy. It has also powered the Indian stock market to near record highs. A big beneficiary of the stock rally has been the government, which is selling shares in state-owned firms like Coal India, the world’s largest coal miner.

The government, which has a large budget deficit, plans to raise $9 billion in the current fiscal year from share sales and spend the money on jobs for the rural poor and other welfare programs. A stronger rupee also reduces India’s bill for commodities, like oil, that it needs to import.

“If India is to sustain 8 percent growth or 9 percent growth, the only constraint on that can be capital,” said Nikhil Chaturvedi, managing director of Prozone, the Indian real estate firm that is building the Alliance Mall development. “Free flow of capital should be allowed in all sectors” of the economy, he said.

Mr. Chaturvedi, whose joint venture partner in the Alliance Mall is the London-based Capital Shopping Centers, said an appreciating rupee must be tolerated as an unpleasant side effect of the flow of foreign capital.

Source : nytimes.com