Events & Issues
New Delhi, 12 June 2013
The Falling Rupee
VALUE FAST ERODING
By Proloy Bagchi
The value of the Rupee is gradually eroding. This was
underscored in a recent RBI report which studied the share in circulation of
various currency denominations in 2010-11. The study effectively reflects how the
erosion picked up pace since the economic reforms process began in 1990-91 and,
seemingly, accentuated since 2003-04.
Pertinently, the research reveals that in 2010-11 the share
of Rs 500 denomination notes “has gained significance and accounted for 47 per
cent of the total currency in circulation” and quickly emerged as the second
most important denomination since 1998-99 and then became the most important in
2003-04 replacing Rs 100 note.
This is not all. The report indicated that the Rs. 100 notes
which had a significant presence in circulation even after introduction of the
Rs. 500 one lost their second position after introduction of the Rs.1000 notes
in 2007-08 and came to account for 27 per cent of the total currency in
circulation. Accounting for nearly 50 per cent of the value of the total
currency in circulation from 1970s to 1990s, the share of Rs 100 steeply
declined to 14.8 per cent in 2010-11.
Going progressively back in time, the study has traced the
changes that occurred in circulation reflecting the emerging usage pattern of
currency notes of various denominations since 1970s. It also reflects changes
in the state of the economy over the last few decades. Pertinently, rise in
prices of goods and services is a problem that has been stalking the country
since Independence.
In fact, since India became free, prominent
national leaders in almost every speech talked of fighting what they called a
“monster” and yet they could never put a leash on it. The prices kept moving
northwards and simultaneously the smaller denominations rendered valueless,
kept falling by the way side.
During the “license-permit raj”, with the so-called Hindu
Rate of Growth of 3 to 3.5 per cent there used to be incremental price rises
barring the sporadic bouts of high rate of inflation. The currency did lose its
value but the process was gradual except during years of extraordinary stress
on the economy.
However, with the opening up and liberalisation of the
economy in the 1990s the fall in value of the Rupee gathered momentum and it
picked up pace in tandem, with the rise in the rate of growth. The decline in
the rate of growth during the economic slowdown since 2008 has surprisingly
failed to arrest the Rupee’s depreciation.
All this is amply illustrated by the RBI study. Between
1970s and 1990s 100 Rupees notes occupied a significant position accounting for
almost 50 per cent of the currency in circulation as against around 14 per cent
in 2010-11. Likewise the share of 10 Rupees
currency that was pretty high before the 1970s, around 34 per cent
during the 1970s-1990s progressively declined and came down to only 2 per cent
in 2010-11.
As we all know, there has been enormous shrinkage in the
Rupee’s value. Whereas at one time, especially during the 1950s-60s, Rs 10 commanded
appreciable purchasing power, its value today is, perhaps not even like that of
one Rupee of those times.
The research also revealed that the currency note of Rs 20 denomination
that was introduced to supplement Rs 10 notes remained important only until
1982-83 and constituted 8 percent of the notes in circulation. But it lost
whatever little significance it had by 2010-11 when it accounted for only 0.6
per cent of the notes in circulation.
Similarly, the Rs 50 denomination currency introduced
presumably to reduce usage of Rs 10 and 20 notes became the second most
important denomination in the 1980-90s. While in 1992-93 it accounted for 32
per cent of the currency in circulation its importance in 2010-11 came to an
utterly insignificant position of 1.7 per cent.
Notably, the study has not dealt with coins that used to be
or are in use. Perhaps, it was confined to the circulation of currency notes of
Rs 10 and above. Along-side no mention has been made of the Rs 1, 2 and 5 notes.
Possibly these are no longer being printed, having been substituted by coins.
While Rs 1 and 2 notes have disappeared from circulation one occasionally comes
across soiled Rs 5 notes.
Ditto the case of coins of fractions of a Rupee which have
long since disappeared. A cost benefit analysis led to discontinuance of
minting of 1, 2, 3, 5 and 10 paisa coins,
eventually ceasing to be legal tender along-with the 25 paisa in 2011. Though the 50 paisa
coin continues as a legal tender, it is not seen any more, having lost
practically all its value.
Alas, small change has simply vanished from the markets.
Today’s small change constitutes the Rs 1, 2 and 5 coins. The recently
introduced Rs 10 coins are not yet quite visible.
Undeniably, empirical studies generally reflect accurately
the situation on the ground. Those of us who spent our adult life in post-Independence
times know how over the years the Rupee saw its value being pared down.
Gone are those days of 1950s and 1960s when a seer (approximately a kilo) of grains
--- rice or wheat --- and lentils would be available for 10-12 annas, from half to three quarters of a Rupee
and a kilo of mutton for Rupee 1. In those far-away days fractions of a Rupee
had value. One could have a meal in less than an Rs one.
Being packed with value, Rs 1, 2 and 10 were very precious.
Incomes were by and large low and so was consumption and hence what circulated
more were the coins and currency of lower denominations. Even the then
prestigious Civil Services commenced with only three-figure salaries, slowly
progressing to four figures and retiring off officers when they came close to
five figures. Today, with the steep fall in the Rupee’s value the pension of
the same officers is in five figures!
Clearly, the prospects for the Rupee do not seem very
bright, what with adverse trade balance, high current account and fiscal
deficits, mounting external borrowings and slowing economic growth. In
addition, with large scale political and bureaucratic corruption involving mind-boggling
sums enormous amounts of unaccounted wealth is floating in the system pushing
the demand that a weak supply network is not able to meet.
The consequential inflationary pressure on the economy is
most likely to further weaken the Rupee. Sinking to 58 to a US dollar is a sign
of weakening of the Rupee. Soon the RBI might find that Rs. 500 currency notes
have been displaced from their prime position by Rs 1000 notes! ---- INFA
(Copyright,
India News and Feature Alliance)
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