The rupee needs to be defended at all costs

Some funny things are happening to the national currency these days. Time was, during the bad old days of the British Raj, when the Indian rupee was one of the strongest currencies in the world and was not only fully convertible but also legal tender in all of South Asia and large swathes of terra firma in the Middle East. But over the past few decades and during the past few weeks in particular, its value vis-a-vis the reigning US dollar, has been sliding continuously. And the funniest (i.e. funny peculiar, not ha ha) part is that most people don't seem to care a tuppence.

This is because a falsehood has been -- and is being -- propagated that the fall in the external value of the rupee does not in any way affect the economic well-being of the overwhelming majority of the populace. Indeed, there is an influential and very vocal lobby which seems to believe that the continuous erosion in the value of the rupee is good for the economy. According to the worthies who constitute this lobby, the sliding rupee makes Indian exports more competitive in foreign markets.

Of course, other things being equal, devaluation of a currency which means lower unit prices of products and services in foreign markets, helps exporters. But the days are long gone when purchase managers and consumers in foreign countries were influenced solely by throwaway prices of goods and services. The champions of continuous creeping devaluation of the rupee need to awake to the contemporary reality that relative affluence the world over in the last three decades in particular, has turned the traditional price-quality consideration topsy turvy.

In the contemporary global marketplace quality, design, timely delivery, durability and after-sales service capability are the vital purchase-influencing considerations rather than price competitiveness. And on all these fronts, Indian exporters have a poor reputation. Which is why India's annual exports revenue has stagnated at $30 billion for the past decade, continuous depreciation in the value of the rupee notwithstanding.

The second argument against permissive creeping devaluation of the rupee is the import-intensity of the Indian economy. The 40-year socialist thrust towards `national self-reliance' has been a disastrous failure and contemporary India is heavily dependent upon imports for its energy, industry, defence and capital requirements.

Thanks to the pathetic inability of the inept and utterly corrupted public sector monopoly ONGC (Oil and Natural Gas Commission) to raise crude oil production which has been stagnant at 30 million tonnes for almost two decades despite the subcontinent being rich in proven reserves, the Indian economy is heavily dependent upon imported crude oil and its derivatives for its energy requirements. And with crude oil prices having risen from $ 19 per barrel to $ 32 in the international spot market over the past six months, almost $ 20 billion of India's projected export revenue earnings of $ 35 billion this fiscal year will be consumed by the oil import bill.

Moreover, with India obliged to rapidly phase out quantitative restrictions on imports and to scale down its hitherto sky-high tariff walls, one can confidently predict a surge in the nation's import bill in the near future. And a weak rupee in an increasingly import-intensive economy portends double digit inflation.

Unfortunately, there is no dearth of short-sighted wiseacres who are ready to argue that the recent slide in the value of the rupee vis-a-vis the US dollar is nothing to worry about because all major currencies of the world except the yen have lost ground against the almighty dollar. They are quick to point out that between mid-August 1999 and mid-August 2000, the rupee has depreciated a mere five per cent against the dollar, while the Indonesian rupiah has depreciated 18 per cent, the French franc and the deeutschmark 14 per cent and even the hitherto rock steady British pound sterling has lost seven per cent of its value against the dollar.

True, but these currencies (barring the rupiah because Indonesia took the same barren state capitalism road as India 50 years ago) haven't been continuously depreciating by 15-20 every year like the miserable rupee. Since 1990 the value of the rupee against the dollar has plumetted by over 164 per cent from Rs.17 to Rs.45.89 to the dollar. And I recall that when I last went abroad in 1988, I purchased the pound (if memory serves me correctly) at Rs 28. Today, I would have to fork out Rs 65 (down from Rs 70 until recently) to buy one pound sterling which is what one tips taxi-drivers and doormen in Blighty. Which is why I haven't ventured abroad since then. But I notice that the outflow of politicians and bureaucrats (whose job it is to defend the rupee) to hard currency areas has not been affected in the least.

Yet the moot point is that with informal devaluation of the rupee proving to be of hardly any help to exporters and serving instead to widening the trade deficit within the increasingly imports-intensive Indian economy, the Reserve Bank and the Union government should pull out all the stops to defend the rupee. Of course, the preferable remedy is to reduce the government's fiscal deficit which is the main cause of persistent six per cent plus annual rate of inflation (against the average two to three per cent in the US) and to improve the overall productivity of industry and agriculture rather than RBI intervention in the currency or inter-bank lending markets.

But these remedies are not mutually exclusive. Currently, the nation's foreign exchange reserves of $ 35 billion are large enough to support judicious periodic RBI interventions in the currency markets to prop up the rupee. For the same reason there is a case for calibrating interest rates.

Regrettably, there is insufficient awareness among the nation's trendy, neo-liberal economists who are dictating the national agenda, that a continuously depreciating rupee is likely to put off foreign investors (as is already beginning to happen). Not only will foreign investors be tempted to hold back investment until the rupee plumbs the depths, even psychologically, investors tend to be deterred from investing in an economy whose currency is weak. From their point of view, their profitability in dollar terms may well become negligible because of the host government's inability or unwillingness to defend its national currency.

And lastly, a continuously depreciating rupee is bad for national morale and self-confidence because small foreign change buys huge stacks of rupees and transforms visiting foreigners --including humble tradesmen such as masons, plumbers, brick-layers -- into instant rupee millionaires. But then, if the nation's me-first politicians and bureaucrats had ever worried about such intangibles, the once internationally and domestically respected rupee wouldn't have become the contemptible funny money it is today.

Dilip Thakore was the founder-editor of Business India and BusinessWorld and is currently editor of EducationWorld.

Dilip Thakore

Money

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