Economic
Highlights
New Delhi, 7 May 2010
Rising
Rupee
GOOD
OMEN FOR INDIAN ECONOMY
By
Shivaji Sarkar
Is
it good or bad news? The rupee is appreciating against the dollar and other
major currencies. Should one celebrate or not is the big question before the
citizens, the industry and the government.
The performance of the Indian rupee
against the dollar has improved significantly in the 2009-2010. The rupee has
shown tremendous strength against the US$ as the rupee-US$ exchange rate
appreciated to Rs. 44.33 per dollar on April 16. In end-March last year it was
Rs. 52.2 per dollar. In an overall estimate, the rupee has appreciated by 15
per cent in a year. According to the Economic Survey 2009-10, the main reasons for
this appreciation is the significant change in the foreign institutional
investment (FII) inflows, ($ 23.6 billion between April and December 2009), continued
inflows under the FDI and NRI deposits, better economic performance of the
Indian economy and weakening of the US dollar in the international markets.
However, there are different views.
Exporters have an aversion for any raise in the rupee value. They have
reasons--it affects their earnings. The exporters reasoning gets support from
the industry body, the FICCI, which is in agreement with them. In contrast, the
importers, including oil companies, heave a sigh of relief as the rupee rises.
It lowers the import bill and helps stabilizing oil prices in the domestic
market and reduces cost of operation.
Obviously there is a conflict of interests.
These are, however, sectoral interests. So the next question is: Should the
economic parameters be decided only by narrow vision? It cannot be. Some years ago,
the former Prime Minister, Atal Behari Vajpayee, had said that he dreamt of
travelling abroad with the rupee and the world market respectfully demanding it
and not the dollar. This must be the vision.
Whatever the appreciation, the rupee
however remains far below its value in 1996, when it was priced at Rs 35 to a
dollar. Effectively this means that the rupee still has not appreciated and
that its value was far higher only some years ago. In 1992, when the Indian
economy was said to be gasping it was priced Rs 30.6. Thus, the hullabaloo
about its appreciation is over nothing.
By April 2002, it had touched Rs
48.9 per US dollar. From 2002, the rupee reversed direction and appreciated
every year, except in 2006, till it reached Rs 40 to a dollar in April 2008.
Over 2008-09, as the global financial crisis unfolded, the rupee depreciated sharply
to 50 to the dollar by April 2009. In comparison, the Indian trade account (oil
plus non-oil) has been systemically negative over the past three decades from
1980-81 till 2010. The current account - goods and services business - has also
been consistently negative from 1980-81 to the first nine months of 2009-10,
except for the three-year period from 2001 to 2004.
The rupee’s gain should be a matter
of pride, though there could be some hiccups. The world, including the
erstwhile most powerful nations such as the US
and the UK, is looking
towards India
for their own revival and sustenance. After all, someone
has to lead the next global charge? The majority of the developed economies are
either bogged down in the substantial quantities of debt that they desperately
need to pay off, or weighed down by those elderly populations, such as Germany and Japan, who are weakening the consumption
growth and leading to export dependence.
The
consumers given the high poverty level are still found in India. It is
understood that no economic growth can be sustained by exports alone. Domestic
consumption boosts the process. While the US
economy had that strength, India
needs to bolster it.
Importantly,
the country needs to take care of its low-value exports for sustaining some
jobs. But the entire international trade is limited to 15 per cent of the GDP
and has a mere two per cent share in the world trade. So its strength would not
be judged on it. Instead, there is need to concentrate on other issues.
If India wants to be a super power, it
can never achieve this dream if its currency lacks the strength. The concern
remains simply because not all parameters are as strong as these seem to be. The
current account deficit veers around 3 per cent at $ 12 billion. But that would
remain so unless the country takes steps to strengthen the manufacturing side and
go into high value exports.
It is also not appropriate to say
that high rupee value affects exporters. It has helped the exporters as input
costs have come down. Many Indian export businesses such as gems and jewellery
depend on imports add value and re-export. Both the garment and textile
business face some problems as prices are set in advance. In a global business,
the country has not created the strength that it needs to. This weakness has to
be overcome through policy changes.
Contrast this with the gain of
fast-moving consumer goods (FMCG) companies’ benefits owing to raw material
costs. Prices of many key ingredients of items such as soaps, detergents and
hair oils and materials for packaging have increased in the international
market by a whopping 34 to 40 per cent. A rising rupee would negate the impact
of cost increases such as palm oils, used for making toilet soap.
Indeed, the gain possibly of a
rising rupee is more in the long run rather than a short one. It also affects
the Indian MNCs whose overseas subsidiaries lose notional value for the time
being. But these are accepted as part and parcel of the business risk. These could
never be fully hedged and should not be an argument for keeping the rupee value
low.
Those seeking the Reserve Bank’s intervention
forget that it has many ramifications. If it buys dollars it releases more rupees
and this may add to the inflation. If it increases the interest rate it invites
dollar deposits and that too further appreciates the rupee.
The dollar has to lose its shine as
the US
economy continues its downward journey. The rupee cannot be kept at an artificial
low for long. It would rise against all international currencies. In sum, it should
be treated as a welcome sign for the Indian economy.—INFA
(Copyright, India News and Feature Alliance)
|