The rupee's record-breaking slide against the dollar last week seriously tests the resolve of policymakers to defend the domestic currency in the face of an unholy combination of domestic and external factors. It is true that none of the factors pushing down the rupee is either new or unanticipated. Nor is India's predicament unique. Nearly all the currencies of other emerging markets have declined in dollar terms. While the government has identified the eurozone crisis and the increased outflow of foreign institutional investment as being the principal causes, one has to look at the shortcomings of its macroeconomic policies, especially those relating to the external economy in the context of an extremely uncertain global environment. Clearly a proximate cause such as the fast deteriorating eurozone crisis has had the potential to exacerbate one of India's well known structural rigidities, the dependence on volatile capital flows to bridge the current account deficit and support the balance of payments. The eurozone crisis has heightened risk aversion, leading to a flight of capital from countries such as India to safe havens. Many other emerging market economies have lost out but India, having an unacceptably high current account deficit, is particularly vulnerable. Again, the crisis in Europe has caused a dent in India's merchandise trade — the EU has been one of India's important export destinations. Moreover, European banks are among the largest providers of short-term debt to Indian companies. Obviously, their losses in Europe will have to be at least partially met by pulling out of India.
It is clear that a combination of interdependent factors is contributing to the rupee's decline. A multi-faceted problem does not admit of simplistic solutions. For instance, the suggestion to use the country's still sizeable-forex reserves to stem the decline is fraught with risks. The size of the reserves has been declining over the years. Experience in other countries suggests that reserves are best used to even out violent fluctuations in the exchange markets, seldom to defend the home currency over a long period. The government has announced a few austerity measures. While these are welcome, they are at best symbolic gestures. More effective measures should aim to check the trade and current account deficits. Unfortunately, many of the factors contributing to the widening deficits are beyond the control of the government. Oil prices are expected to remain sticky at the current high levels. The import bill is unlikely to come down in the foreseeable future. On the other side, exports have faltered after a heady run during most of last year. The rupee's fall is a symptom of a deeper economic malaise.
Keywords: rupee value, rupee depreciation, India economy, global financial crisis, global slowdown, eurozone crisis, foreign exchange
This is in response to ajeet the depreciating currency helps our
eexports only for a certain intial time. But the cost of manufacturing
those exports goes up with depreciating currency as the cost of fuel
and cost of raw materials and cost of employing people goes up in the
local currency. so it will decrease our efficiency in the end. The
export market depends on efficient manufacturing at a lower cost.so
the export what kind of human resources and infrastructure we have
got.Depreciating currency does not help our exports. What do you think
we are imporitng from Zimbabwe nothing we may actually exporitng to
it.Germany has the strongest currency still it is a net exporter (no
trade deficit).The one thing that can certainly help our exporting is
lower taxes and less regulation.For all interested in the prosperity
of our country i would to suggest a book.The book title is 'The case
for Gold' by Ron paul and lewis lehrman. It is avilable free on google
books.
When S&P declared Indian economy in negative side Mr. Pranab mukherjee came in front and said 'this is not a condition to panic but it is an alarm'. This statement gave a huge sign of relief in a citizen's mind. PM said that there needs to be a reduction in subsidies to cope up with inflation. Now it is the time that congress instead of giving speech should take bold decisions without considering its allies and its political future prospect like it did in N-deal issue. It is the duty of central government to take necessary steps to bring down inflation, reboost our economy and put an end to corruption which were numerated as the factors responsible for this malaise by Montek singh ahluwalia.
Your lead item editorial under heading 'Signs of a deeper malaise' is
an well articulated one. You are right when you stated that the
rupee's fall is a symptom of a deeper economic malaise. Really, our
economy is fast moving towards a disaster with unimaginable bleak
scenario. With the parameters of economic indexes viz., shrinking GDP
rate below 6.5 % , pitiable Balance of Payments position with
burgeoning current account deficit , with only six months foreign
reserves stock, unmanageable fiscal and revenue deficit and the ever
growing quantum of black money syndrome are posing a serious challenge
to the South block mandarins. Considering the economic state of our
country, it appears that, We, are soon going to lose our economic
sovereignty. The union finance ministry led by Mr. Pranab Mukherjee
must owe an explanation to the country as to which directions our
country is going, are we be a ‘bankrupt’ nation in the coming days?
The rupee depreciation can be looked as an accident waiting to happen, or it could be looked at as a windfall. There are countries which try hard to have undervalued currencies to make them more competitive. Perhaps it's time that Indians stop looking at the value of the currency as an extention of the national ego. This is the invisible hand that will force the managers of India's economy to take the hard decisions they have been putting off so far. To start with, this will give the FM a good reason to drop unecessary subsidies on fuel, fertilisers and increase taxes on the rich, especially estate taxes that were shortsigtedly done away with in '92.
Only good that falling rupee has done to Indian economy is that it has made our import competitive. But why to import when these competitive imports will make the things more costly in India? Six month reserve of foreign exchange won't last long if coherent measure are not resorted to taking care of internal grim and external shaky economic situation. Right now is the time not to plan and impose harsh and outlandish taxation system like GAAR and introduce land acquisition bill. Some provisions in GAAR have to be withdrawn as they prompted the FIIs to withdraw. Some of the clauses in Land acquisition bill are tough enough to stop investors from investing. With every 2 nations out of three in Euro Zone confronted with crisis the Euro has nosedived with corresponding gain to dollar. In such a vicious circle of economy we can expect to be least affected if certain short term measure are taken and long term decision are left for the time once the economy shines pink.
The root cause of our economic woes is that we have become less competitive. We must achieve cost-efficiency in order to become more competitive. This was the main plank of Manmohan Singh's economic reforms in the 1990's. We can begin the task by reducing the financing costs. Reduction in interest rates should be the first step in this direction. Next should be better management of the Government's own finances. The Government and we as a nation are over-spending beyond our means. The Government must find ways for reducing the fiscal deficit.
Why should my one rupee be any less in value than the US dollar? It is the govt of India responsibility to bring value to its currency and its people. These two are linked. In the world stage we will get the respect if our currency is strong. A strong currency is the result of a vibrant economy. The present govt have no time to do the needful to revitalize the economy. It is going from one corruption to the next. Hope the citizens take note of this malise and do the needful.
I hope The Hindu would publish my comments even though they differ from the govt version of the cause for rupee decline. While external factors such as Eurozone crisis have definitely bore down on the rupee, it has been the worst performing currency in Asia. There are several reasons apparent to even a layman like myself - UPA govt inability to push through much needed economic reforms measure, unacceptable level of wasteful subsidy such as petrol price that encourages oil consumption instead of curbing it given oil if the single biggest import. High budget deficit and high inflation (both related as the govt prints more money to pay for the deficit), supply side constraints (FDI in retail would have helped), poor infrastructure, stalled reforms high interest rate putting a chill on consumption and thus stock market is in decline with the resulting outflow of foreign fund used to bridge current account deficit. I feel India is headed for an reenactment of 1991 BoP crisis.
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