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Their smug lies - Views on News from Equitymaster
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  • Jul 1, 1998

    Their smug lies

    How they lie: with their beautiful accents and their polished speeches. Yes, the Indian currency must fall, they say. Because the Japanese yen is falling against the US dollar - so the Indian currency must fall in sympathy. Really, Mr. Policy-Maker? Is that so, Mr. Politician? Between January 1 and today the Japanese yen has fallen from 130 to 138, a decline of 7% and the Indian rupee has fallen from Rs 39.3 to Rs 42.8 - a decline of 7% - in line with the policies and the explanation of our brilliant men who ruin (not run) our country. But did you know that the Japanese yen was 350 in 1985 and has actually gained by 60% over the past 13 years? Can you say that of the Indian currency? Unfortunately not, because the Indian rupee has fallen by about 70% over the same 13-year period. Well, if our chaps in Delhi are so keenly watching the Japanese yen these days what were they doing for the past 13 years? Sleeping? Or is it because they did not have a Reuter's screen to play with between 1985 and 1996 that they did not think of these half-baked reasons for justifying the fall in the Indian rupee. Or maybe it is the classic case of using statistics to prove a lie.

    Some of these decision-makers even have the gall to say, "let the market decide - why should the government or the Reserve Bank of India intervene?" Really? Then why not dismantle the Reserve Bank? Why not just give us all dollars or pounds and let Alan Greenspan decide our economic policy? We certainly won't have to hear these irresponsible statements from the Ministry of Finance. If markets know better, then leave everything to the market. Why waste expensive space in South Bombay and North Block on redundant folks whose only job is to tap Reuters screens. Yes, I am from the private sector. Yes, I deal in markets. And I can tell you this: the markets certainly don't know any better.

    Look at what happened in Asia. Between 1990 and June 1997, the Indonesian Rupiah fell by 20% - a fall of less than 3% per annum for 7 years. Then, one sunny day, the market woke up and knocked the Indonesian currency by 80% over the next 12 months. It now stands at 14,400 and still looks weak. Did something suddenly happen in July, 1997 to make the currency so weak. Did people suddenly discover that Indonesia is an economy controlled by friends of ex-President Suharto? No, the market (the new buzzword in Indian economic policy planning) was busy making money to worry about these minor issues. Times were good. There were no restrictions on currency trading in Indonesia. You could punt, you could speculate, you could trade your grandmother for a deposit in a Singapore bank. The truth is that the markets know no better than the policy makers do. So to leave your currency in the hands of the "market" is plain and simple stupid. And if our men in New Delhi have not worked that out, they need to be removed from office. Because the same Reuters terminal that carries these nice currency quotes can also tell them that devalued currencies and IMF prescriptions are the problem in Asia, not the cure! Weak currencies have not helped Asia recover - the Chinese are smart enough to know that and are keeping their currency steady and absorbing pain. And India? Still busy protecting its rich industrialists and exporters.

    Which comes to another aspect of this weak currency myth: knocking the Indian rupee will improve India's exports. Humbug. It will only make our exporters sleepier - like the policy-makers in New Delhi. India has been subsidising the exporters for too long. From Rs 9 to a dollar in 1980 to Rs 43 to a dollar today, we have helped exporters get rich on price advantage that you and me pay for. Have any of our garment manufacturers made a dent on the quality front? No, they continue to offer the cheapest quality of product and compete at the low end of the price range. Instead of giving them all that free money and making the country poorer, the government should have spent more money on roads, ports and power plants. That would have also given some benefit to the rest of us poorer Indians. But instead the myth of a weak rupee being a cure for all carries on. From Rs 9 in 1980 to Rs 43 today - an 80% decline. Do you feel richer? I know that the exporters do. And so do the manufacturers of products that are saved by the collapsing currency. While our currency bleeds the government expects to get money from NRIs who have lost thousands of crores of rupees due to the continued devaluation. Not to forget the multinationals that hesitate to invest because their required returns on capital have to include a steady 6% fall in the Indian rupee. The biggest scam of the decade has been the currency policy. And the culprits get away with promotions!



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