The Rising Rupee

B C Dutta
The Staesman, 11 october

The almighty dollar has dominated the world for long. Germany and Japan came into economic prominence because of their strong currency. Let the strong rupee keep India's head high in the global economy.

To contain inflation, the government has taken several measures ~ reducing the rates of duties on several consumer goods, hiking the rate of interest and allowing appreciation of the rupee.

The effect of our currency appreciation manifests itself as a double-edged sword. The rupee becoming dearer, the prices of articles in the home market become cheaper checking inflation to some extent, but the appreciated rupee makes our exports dearer leading to a decline in export earnings. Imports become cheaper. However, our import bill being usually higher than export earnings, India’s trade deficit is likely to come down with the appreciated rupee.

These measures have caused the inflation to fall recently to the lowest level in nearly five years to touch 3.32 per cent. But despite the price index being low, the prices of primary articles, including major food and non-food items, have risen. For households, lower inflation does not mean that the prices are not rising, what it means is that the increase is lower than what it was in January this year when the inflation rose to 6.69 per cent.

Pushing up the supply of goods by increased production is primarily needed to restrain price rise. But a high interest hardly induces the industrialists to invest to increase production. The high interest hikes the cost of production leading to low profitability restraining the investors to invest. So, a high interest is not suitable to restrain the price rise; instead, for the common man’s relief arrangements may be made to supply the essential articles to the people at subsidised prices.

Some are of the opinion that India being one of the fastest emerging economies of the world has resulted in the rupee appreciating to a nine-year high against the dollar. Once traded at around 47/48 rupees, now it is traded at 39.63 per dollar. Our rupee has appreciated more than 10 per cent against the dollar so far this year.

It depreciated steadily for a decade after being floated in 1993. In 1993-94 it was Rs 31 a dollar and it became Rs 48.40 a dollar in 2002-03. After that the rupee appreciated steadily. It not only appreciated against the dollar, but against other currencies as well. Between January and May 2007, the rupee rose against sterling, euro and yen by 8 per cent, 6.9 per cent and 11.2 per cent, respectively.

The currency of a nation usually appreciates against any other currency when its demand is higher than the demand for the corresponding currency. Our market is overflowing with forex inflows: net investments by FIIs were $10.16 billion during January-June 2007, likewise FDI inflows touched $19.53 billion in 2006-07, a very high increase over last year. Hence the steady inflow of dollars, has naturally led the rupee to appreciate in terms of the dollar.

Though the appreciation of the rupee depresses our export earnings, we get imported goods at cheaper prices, so the inflation-struck consumers are benefited at the cost of indigenous industries which suffer due to the impact of low-priced imported goods.

The rising rupee will soften the impact of rising oil prices and make capital goods cheaper. On the other side, with the appreciating rupee making exports costly, we stand to lose business to our competitors, particularly in the export of textiles, leather, jewellery and gems and information technology. But the shortfall is marginal and likely to go. The slowdown in import demand from the US is likely to be neutralised to some extent by the strong import demand from China.

Recently in Washington our finance minister admitted that appreciation of the rupee was “well beyond comfort levels”, but he asserted that this was “something we have to live with and our exporters will have to learn to live with it”.

However, to ensure that the rising rupee does not arrest the export growth trend, customs and excise duties may be lowered ~ such moves are unlikely to be objected to by the World Trade Organisation which cracks down on sops for products and services.
Communist China has dominated the world through high export performances, by securing high per capita productive efficiency of its workers who work 11 hours a day and are paid on output basis in the Special Economic Zones to turn out cost-competitive products for export. This will hardly be possible to achieve in India, thanks to our communist leaders.

But higher productive efficiency of our labour is needed for better export performance. Our labour is cheap and skilled. Let the bulk of our exportable cost-competitive products come, if possible, from labour-intensive industries to achieve this fiscal’s export target of $160 billion.

The almighty dollar has dominated the world for long. Germany and Japan came into economic prominence because of their strong currency. Let our strong rupee keep India’s head high in the global economy.

(The author is a retired Indian Revenue Service official)