We have been watching it for decades — the steady erosion of the rupee to the dollar (and other currencies). There is a sense of inevitability about it; the country has simply given up.
Several explanations are routinely given, a broken record really: “It is good for India’s exports (a sad statement that we can compete only on price).” “India is dependent on oil imports and we don’t control oil prices (failing to acknowledge that rupee to dollar erosion is a continuous phenomenon even as oil prices have gone up and down).”
“Forex value is determined by external developments like ‘Quantitative Tightening’ (what is going on now) and ‘Quantitative Easing’ (almost continuously since ‘Lehman’ and through Covid) by the US Federal Reserve.”
“Forex markets operate in a fairly opaque manner and the demand/supply determines value of the rupee.” “India’s trade deficit is perennially negative (merchandise Imports > Exports) and therefore the rupee will be weak (failing to acknowledge that our biggest export is that of manpower, both IT exports which is nothing but labour/man hours, and expatriate remittances which is also labour, together making up $225+ billion of exports a year).”
“Inflows/outflows of FPI money impact the rupee value (FPI inflows over time have been significant, yet the trend in rupee weakening is continuing).” “The dollar is the global reserve currency and therefore there is a flight to dollar in times of uncertainly, and this will keep the dollar strong (except Chinese and Japanese investment in US securities have come down recently, yet the dollar is strong).”
It would appear that the depreciation in rupee value is a given. One needs to question this fundamentally, given that India has moved to the fifth largest economy in dollar terms, despite the rupee depreciation.
We seem to have a timid view when it comes to the forex market, a mind-set still caught in a Third World trap.
As for the current lowering of the value of the rupee, the explanation has come quickly – “The Rupee is performing relatively better than a basket of other currencies, so we are OK”. This glosses over the fact that the Indonesian Rupiah, Korean Won, Chinese Yuan, Malaysian Ringgit and the Thai Baht have all fared better versus the dollar than the rupee.
What if rupee appreciates?
What if the rupee was trading at ₹60 to the dollar — the level about a decade ago — and not at ₹80+? This hypothetical question is worth exploring.
Several benefits will flow through: The drain on the import bill of oil will come down. If the price benefit is passed on, the consumer can get a 20 per cent plus reduction in the price of fuel, which will automatically translate into an annual stimulus in excess of ₹2 lakh-crore, money that will go into consumption of other goods.
India is struggling with a surge in prices of imported fertilisers — the subsidy this year will be over ₹200,000 crore on fertilisers. This can be pulled back. The high fuel cost has a cascading inflationary effect on the entire economy, and that can be moderated. A big chunk of India’s capex goes to foreign suppliers of equipment, and this can be more efficient. India’s GDP in dollar terms will be at least 25 per cent higher. India will fast edge past Germany. The perception impact of this will be dramatic.
But what will then happen to exports? While some vested interests will protest, we should remember that the exporters were performing even when the rupee was trading around ₹60 to the dollar; they were not complaining then.
There is an old saying “Do not catch a falling dagger. It will hurt you.” That is not suggested here. What is being proposed is a concerted plan of action, making use of expectations/optics about the rupee-dollar exchange rate.
If the analysts and pundits say the rupee will weaken, it will automatically slow down the flow of dollars to India, as people hold back expecting a weakening of the rupee. If the rupee is expected to strengthen, then immediately dollars start to flow into the country fast as no one wants to lose with lower exchange rates at a future date.
Need for intent
Let us start with the intent. There should be a clear signal that there is a plan to strengthen the rupee quickly. Such a statement should be followed with coordinated action, including but not restricted to the following: Draw up and implement a plan for reduction in oil consumption and imports, and elimination of waste.
Oil consumption is projected to increase by 3 per cent per annum. Target zero growth in time, by encouraging alternative fuels as well as conservation of oil.
Aggressively pursue non-dollar sources of oil. This has commenced with imports from Russia going up.
Reclassify the way exports are reported. Bring in all the exports together, including export of labour, and present a more healthy state of the foreign exchange inflow into the country. Step up all the activities that attract flow of forex/$ to the country – exports, FDI inflows, tourism earnings (rebounding all over the world) et al.
Attract diaspora funds
As a statement of seriousness, float “PM Build-India-Bonds” that offer decent returns. Target raising $25 billion or more quickly, enough to make an impact, from the Indian diaspora (over 30 million, with over $1 trillion in assets), structured in a manner that does not add to the external debt position in the government’s books.
Eliminate wasteful imports that can be easily produced locally.
With most of the Western world in a difficult economic space (due to the Ukraine war and other issues), India has a tremendous opportunity to surge ahead.
A strong rupee can turbo charge this process. The political windfall of this achievement will be dramatic.
The writer is Group CEO, RK SWAMY HANSA