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A double-edged sword

Poverty, illiteracy and unemployment will not disappear in a tearing hurry despite a lot of tall talk about growth, writes Paranjoy Guha Thakurta.

india Updated: Dec 12, 2007 14:21 IST

Once upon a time in the not-too-distant past there used to be economic commentators and analysts galore who would love to preach about the virtues of a strong national currency. It used to be said that the strength of a currency reflected the clout of a country’s economy, its purchasing power and its position in the comity of nations. As the American greenback progressively weakens against the sabse bada rupaiya, these same learned observers are singing a different tune.

The rise in the value of the Indian currency against the US dollar is a double-edged sword that cuts both ways. By making exports more expensive and imports relatively cheaper, the rupee’s appreciation vis-à-vis the dollar results in macro-gain and micro-pain. The key question is whether the gains outweigh the losses or vice-versa. The answer is not simple. The gains are not easy to ascertain while it is much simpler to quantify the losses.

In March, the Reserve Bank of India almost suddenly stopped intervening in the foreign exchange markets by mopping up dollars to ensure that the value of the rupee was artificially low. Consequently, the rupee gained against the dollar by a huge 8.5 per cent in less than 40 working days in March and April. Thereafter, the appreciation was gradual. By the end of October, the rupee had gained roughly 15 per cent against the dollar over a 12-month period and its value had touched a peak over nearly a decade.

The appreciation of the rupee was evidently part of conscious official policy to contain inflation at a time when rising prices (especially food prices) were threatening to rapidly erode the popularity of the powers-that-be and negate whatever benefits that were accruing to the aam admi. Put simply, the RBI was finding it tough and expensive to ‘sterilise’ the rising inflows of foreign currency and prevent these from adding to domestic money supply and thus, stoking inflationary fires.

Let’s first consider the downside of the rupee’s appreciation. Union Commerce Minister Kamal Nath told Parliament on December 4 that two million people could become jobless in export-oriented industries in different parts of the country. While exports as a whole were growing, there was a net decline in exports in certain sectors like textiles, garments and leather leading to job losses.

An earlier survey conducted by the Commerce Ministry in July was less alarmist but troubling nonetheless. It said 200,000 jobs would be lost in garments and textiles, 80,000 in Tirupur (Tamil Nadu) alone, famous for its internationally-renowned hosiery manufacturing units. In just six leather- making companies surveyed by the ministry, profitability had crashed three-fourths and nearly 2,000 workers had been rendered unemployed. The other export-oriented industries that have been badly hit include processed agricultural products, handicrafts, sports goods, chemicals, engineering items and marine goods.

The survey, conducted by a senior ministry bureaucrat, pointed out that since 70 per cent of India’s exports are denominated in US dollars and since many export industries operate in buyers’ markets that are ‘elastic’ — in other words, demand falls when prices rise even a little — exporters have not been able to change their invoicing patterns to rupees, leave alone euros. In a country where employment is not easy to come by, such job losses can hardly be justified even if one argues that the Indian economy as a whole has gained on account of a strong rupee.

The complaints of high-profile exporters of computer software and information technology (IT) enabled services or firms engaged in business process outsourcing need not be taken as seriously as the loss of jobs of unorganised workers in Tirupur or Moradabad in Uttar Pradesh (well-known for its brass handicrafts). The IT sector has been a beneficiary of generous tax concessions. Today its profit margins have been squeezed. But the industry knows it will have to live with a progressively stronger rupee especially since it believes Indians are no longer mere ‘cyber coolies’ but have graduated to become ‘knowledge workers’.

Many Indian exporters have been pampered in the past, which is not unusual since the country had to live for decades with acute shortages of hard currency and the government believed in export-promotion and import-substitution. The situation has undergone a seachange since. At over $ 260 billion, India’s current forex reserves are an embarrassment of riches. We have a real problem of plenty on our hands. Unlike China, the Indian economy is not export-driven. International trade (exports and imports) accounts for less than one-third of the country’s national income against over three-fourths in China. Hence, China’s weak yuan policy is predictable. Not so India’s policy encouraging a strong rupee.

The other side of the story is that the growing clout of the rupee has cushioned the country from the impact of the sharp rise in world prices of crude oil: up from $ 53 a barrel in January and $ 65 a barrel in May to kissing the $ 100 a barrel mark in December before coming down a bit. The gains from the new exchange rate are substantial since India imports three-fourths of its total requirements of crude. At the same time, the benefits of diesel prices not going up sharply are not that easily visible or quantifiable. An unintended result of the appreciation of the rupee is that India has become the 12th country in the world with a one-trillion dollar economy and, of course, the third largest economy in the world in terms of purchasing power parity after the US and China (by overtaking Japan).

Indians are bringing back their dollar stashes in foreign banks. That makes common sense. Indian companies are being told not to borrow abroad. The government is beginning to discourage non-resident Indians from parking their funds here and encouraging individuals here to buy more dollars — a situation that would have been unthinkable for the first four and a half decades after the country became politically independent. The stock exchanges are booming thanks to unprecedented inflows from foreign institutional investors who are sold on India’s ‘growth story’. Flows of foreign direct investments are at record levels.

Meanwhile, the American currency continues to decline against most other currencies. The depreciation of the US dollar is sending shock waves across the planet. The rest of the world saves so that American citizens can borrow beyond their means — to the tune of over $ 2 billion each day. The US has invested in China and India less than half of what these two countries (accounting for 40 per cent of the globe’s population) have invested in the world’s largest economy. The US accounts for 5 per cent of the world’s population and a quarter of its wealth. Economist Joseph Stiglitz has calculated that by investing in American treasury bonds, developing countries end up losing over $ 300 billion a year — four times the total amount of international assistance to all so-called Third World countries. For decades, US governments were able to pressurise Asian countries not to appreciate their currencies. But that’s all history.

Should we then feel proud and patriotic about our strong currency because resurgent, muscle-flexing, macho India is no longer being derided as a land of snake-charmers? Not really. Poverty, illiteracy, unemployment, inequality and regional economic imbalances have not disappeared — and will not disappear — in a tearing hurry despite a lot of tall talk about ‘inclusive’ growth.

So who’s afraid of a strong rupee? Not the new Indian tourist who prefers Bangkok to Bangalore. But do spare a thought for the families of those who have lost their livelihood for no fault of theirs.

Paranjoy Guha Thakurta is Editor, Realpolitik