Economic Highlight

9 May 2014, New Delhi

A Stronger Rupee

HOPE FOR A BUOYANT INDIA

By Shivaji Sarkar

There’s a wee bit of good news. The rupee has gained a bit. It touched a high of Rs 59.77 to a dollar in April and remained around Rs 60 during the elections. A ‘favourable’ political climate, a supposed stability after the polls, is said to be the cause for its rise.

Does it predict a trend of the rupee regaining its strength? Not necessarily. Since 1996, almost at every election the rupee gained during polls but lost soon after. During the past few years, Finance Minister P Chidambaram, predicted its rise a number of times. It went to touch Rs 68.80 in August 2013, an 18-year low.

In 1996, the rupee lost 4 per cent soon after the elections. The reason was no party had gained majority and political situation was fluid. During polls it had touched Rs 34 and by December 1996, it had touched Rs 35.80. During the 1999, 13^th Lok Sabha polls it fell by 0.7 per cent after the polls; in 2004, after 14^th the polls it lost 3.8 per cent and in 2009, after 15^th Lok Sabha elections it recorded 4 per cent loss. It went up by 5.8 per cent during this 16^th Lok Sabha, voting to hover around Rs 60. The rupee was at 63 to a dollar in January.

However, it is difficult to predict whether the rupee would remain at this level after the polls or not. It would be a challenge and a ticklish problem for the new government. A stronger rupee would add to its political sheen, besides add to hopes of the people. It would be considered the beginning of economic resurgence. A repeat of history, the fall after polls, would do just the opposite.

Most people in the country view the currency as a mark of prestige. It is a dream of many Indians that when they go abroad instead of the dollar, people demand the rupee. This has not happened since 1966, when under the US, the IMF and World Bank pressure it was first devalued by 36.5 per cent. At that time a dollar was available for Rs 4.76. The downslide has become a regular phenomenon.

The decision did not help the country. Inflation continued to peak. India links the rupee with basket of currencies of major trading partners in 1975. The link is maintained until 1991 devaluation by 18 per cent. The rupee is made freely convertible for trading but not for investment purposes in 1994.

Importantly, with every devaluation, the country was assured of its exports would rise. But there had been only nominal increases, which did not help the country much. A weaker rupee added to the cost of imports, which remain around 30 per cent of GDP.

Even as the rupee touched the historic low of almost Rs 69 despite the dollar itself losing against the euro, the cry of a group of economists, BPOs and some other exporters was the same. Exports once again did not do the trick for the Indian economy.

In fact, even in 1966 it was considered bad economics. For minor export gains or not, the country added much more to its import costs. Certain imports like petroleum are a necessity to keep the home fire literally burning. It also burnt much of the strength of the Indian economy.

The new government, if it wants to give the economy a new direction, would have to shift the focus from exports. Some of the recent reports of UN organizations like UNDP and ESCAP have called upon all developing economies to shift focus from export-oriented economy. The UN agencies aver that the focus on exports has not helped these economies. It has made their imports expensive and led to inflationary trends.

Buying imported stuff will become a very costly affair, if the rupee is allowed to fall. The country would have to shell out extra on imported goods. For instance, if one bought a product valued $1, one paid around Rs 54 in March 2013 but now one would have to shell out over Rs 60 for the same. If it is allowed to slide after the polls the outgo would be more.

On the contrary, a stronger rupee would reduce burden of oil marketing companies (OMCs), nuclear and alternative power agencies, and this would reduce fuel and transportation cost. It might usher in a lower price regime. The fuel prices have been the major reason for high inflation during the past few years.

The automobile and other industries dependent on imports would get a relief as their cost of operation would substantially come down. If the rupee appreciates, the cost of investments too would come down. In such a situation, the RBI will have an option to cut policy rates. Lending would become less expensive. But the RBI would also have to hedge the depositors against losses. It has to work out a policy for banks to work on low margins – difficult job for banks suffering high losses (NPA).

The RBI policy should give weightage to savings so that the government has to depend less on borrowings of foreign investments. This would help cut in fiscal deficit and would make more money available for investment by banks. It could give a fillip to the economy.

Indian students too would be a happier lot as the cost of studying and stay abroad would come down. This apart their debt burden too would be reduced. Further, a stronger rupee would also protect the country against current account deficit (CAD) as the import bill would be reduced. The present woes are due to widening of CAD and kept under check by showing foreign institutional investor (FII) short-term inflows as earnings-- certainly bad economics.

On the other hand, there could be some problems. Overseas Indians might prefer a depreciating rupee as it adds to their rupee earnings. Those working abroad might have worries of gaining less through their remittances. Those coming for medical and yoga tourism may also detest the idea of a stronger rupee. But it would make Indian tourists going abroad happier as it would become less expensive.

It would also create a barrier against the Chinese dumping of goods. The only other way is to seek amendment to the WTO rules. A weak US economy would obviously resist this.

Undeniably, a feeble rupee over the years has caused many problems. Uncontrolled inflation is attributed to weak economy and falling purchasing power of the rupee. It has led to a cycle of weakening of the currency and economy. But a stronger rupee has many advantages. It could change that cycle, revive the industry and manufacturing. It would be able to buy more and create a syndrome of happiness.

A major gain for both the industry and government would be a check on continuous wage increases. It would reduce expenses on hiring of people and would encourage new employment opportunities. The government with a new vision of breaking away from the past would be able to create a new India. It might just be the beginning of a new stronger and resilient India. –INFA

(Copyright, India News & Feature Alliance)