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The Rupee Bashers

Dec 15, 1997

They are at it again. In 1980 you needed eight Indian rupees to buy one US dollar. By 1990, a loss of control over the government's expenditure and high inflation caused the Indian rupee to fall to seventeen rupees to one US dollar. Ten years of growth in our gross domestic product was negated by a fall in the value of our currency so that, on an international basis, we Indians were as poor in 1990 as we were in 1980. Then we had the IMF prescription supported by our enthusiastic government: weaken the currency further to boost exports. Between 1991 and 1993, the Indian rupee was devalued by 60% so that one US dollar could buy you thirty-one rupees. Conversely, we Indians were made poorer because we now needed more Indian currency to pay for that same one US dollar note.

And now, the Indian authorities seem to have it in their head to let the currency fall. Why? Because this time around the exporters of Indian products and the manufacturers of import substitute products have been spreading the news that due to the Asian crisis, India will lose out on exports and, simultaneously, imports will rise as foreign goods become cheaper than those produced in India. This time there could also be a lobby at work of those who own foreign currency assets in this liberalised era and wish to encash on currency speculative gains.

Lets take the exporters first. Over the past four years till January 1997 most Asian currencies were steady against the US dollar while the Indian rupee had fallen by 60%. Yet the Indian exporters did not manage to gain any significant market share in global exports. If price was the sole criteria, then Indian exports should have zoomed and India should have been running a huge trade surplus while the other Asian economies suffered due to their strong currencies. But the truth is that India has consistently run a negative trade balance suggesting that price is one of the many conditions to boost exports. Quality and delivery are the other important factors. A study of 200 corporates in The Quantum Stock Market Yearbook reveals that these large corporates have failed to add to India's foreign exchange reserves and, in fact, have depleted our reserves by some US$ 27 billion over the past four years. And most of them continue to ask for export benefits - including a weaker currency. It should also be noted that the total of imports and exports accounts for 20% of GDP. Yet, the tail wags the dog and the exporters and importers influence the government as to what the exchange rate should be for all 100% of us. Maybe it is time for the other 80% to wake up, form a union, and tell the central bank to strengthen our currency_or else! There is an election around the corner, use your threat.

The new players in this "weaken the Indian currency song" are the manufacturers of import substitute products. Steel, cement, petrochemicals are some of the global commodity industries. With weakened Asian currencies, they feel threatened that cheap imports will flood the country. So, to save their businesses, they are creating a fear atmosphere that India will be flooded with cheap international goods. That sounds good to me as a consumer: why should I pay higher prices in India when I can buy things cheaper abroad. To save some generational family business? No way. If the manufacturers are scared of dumping, they can approach the government for tariffs - that is fair. But why should the entire country suffer an exchange rate loss to save a few. We have done that for thirty years now and gotten nowhere - just poorer!

Then we come to the new kids on the block. The few elite Indians with dollar assets. They would like to see a weakened currency so that they can show extraordinary gains on their income statements. When your main business is bad, its nice to turn to anything - even dumping your country's currency - to save yourself! But guess what, those who really have the money - the multinationals - would like to invest in India but get scared of any currency weakness. They wish to build factories here and make large investments. Past weakness in the Indian rupee makes it difficult for them to justify to their boards why they should invest in India. Future expected weakness in the Indian rupee pretty much makes any proposal to invest in India a stillborn concept.

A weakened currency, those in power argue, is supposed to bring in billions of multinational money. Really? Well, the Indian rupee has fallen from Rs 6 to Rs 39 in 30 years - and where are the promised billions in multinational money? Where is the export powerhouse? Meanwhile the nation's wealth has been eroded when measured in international currencies. With domestic interest rates at 8% and inflation at 4%, the Indian rupee should be strengtheneing, not weakening. Yet we have had ministers and central bank officials asking for a falling currency. Well, now they are looking at a black hole as the Indian currrency spins out of control. I like many of the reforms but making ourselves poorer by killing our currency is the stupidest thing we could have done because we are not an export-led economy. So cast your vote for a stronger rupee and let the tail stop wagging the dog.

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