The falling rupee affects even domestically produced goods, thus affecting our spending power.
In the last column, we saw how a weakening Rupee affects us. We saw that the imports become expensive because of the weaker currency and creates price inflation. But that is not all. As we will see, even domestically produced goods become more expensive. How?
Let us say, there is an Indian manufacturer selling light bulbs at Rs. 50 per bulb. Let us also assume that one US Dollar equals Rs. 50. So, this manufacturer can sell the light bulb at $1 and get the same price as selling locally. Now let us see what happens when the Rupee weakens to Rs. 70 per USD. Now our manufacturer can get Rs. 70 for the same light bulb, when he sells it overseas for an unchanged price of $1. At this new exchange rate, he is clearly better off exporting than selling it within India. Why? Because he can make more profit and businesses are run to make profits. Alternatively, our ambitious manufacturer can sell his bulbs in the international market for $0.90 (90 cents). He can bring down his price and thus become more attractive to overseas customers, and still get more than the local price. Whatever he sells overseas, he cannot sell in India as his factory capacity is limited. So, all of a sudden light bulbs start getting dearer when you go to the shops and you are forced to shell out more for even a domestically produced good!
Let us now try and see what causes the Rupee to weaken against major currencies like the American Dollar. Let us begin by looking at some of our objects of desire. What is common to Mac book Air, Samsung Galaxy, Nintendo Wii, and Sony PSP, apart from the fact that these are super cool products that everyone would love to get their hands on? You guessed right! None of these are manufactured in India. Of late, we have become great consumers of foreign made products. Even our Diwali crackers and Ganesha dolls are made in China these days. This in itself is not a bad thing, provided we also produce and export cool products that the world wants. Alas, we do not do that. We are exporters of things like iron ore, which are nature’s gifts, but we are not an export powerhouse by any stretch of imagination.
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