Is foreign exchange still precious?

Updated on May 11, 2007 03:03 AM IST
Describing foreign exchange as precious seems to me like wearing bell-bottoms all over again, writes N Madhvan
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None | ByN Madhvan

Consider the strange ways of globalisation. For four decades, India had what some economists called the “anti-export bias.” The country was on the path to industrialising by import substitution, a process in which local industries were made to produce in India the stuff that could otherwise be imported. And this was at higher costs than what the world was paying.

Imports were costly because exports were not easy. Exports were not easy because nationalists wanted to export more of value-added products and not just plain things like mangoes or basmati rice. Jobs were to be created by industrialisation and exports were meant to help import substitution.

The dollar was a big thing those days. You could buy a Bajaj Chetak scooter only if you had foreign exchange to pay, which meant you had to have legal forex collected during postings abroad or from remittances, perhaps. Non-resident Indians were not a ubiquitous tribe they are now. The black market dollar ruled.

Suddenly, everything seems to stand on its head. Foreign exchange reserves have crossed $100 billion, and the rupee, which nine years ago traded at 49 to a dollar, now does so at just a little over 40. If you take inflation at an average of only 5 per cent a year, and compare it with western inflation rates that are far lower, compounded numbers will tell you that a rupee buys far more of imported goods than it did a decade ago.

Exporters, once pampered with tax-free status, are slowly being brought under the tax net under a “sunset” clause that takes away exemptions from them, but at the same time, exporters, including the highly competitive software companies, find their competitiveness eroded.

India’s economy is not what it used to be. As the rupee gets stronger, foreign investors find the economy more attractive because Indian assets come cheaper in dollar terms. That tends to increase the dollar inflows even further, thus raising the supply of the foreign currency. This could in fact strengthen the rupee even further!

So, this once forex-starved nation is realising a truth many loan-seekers know. They say a banker is one who lends you money if you can prove that you don’t need it. Likewise, it seems forex inflows into a country increase after it shows the world that it needs them less.

The stronger rupee could also threaten the competitiveness of some domestic industries. This would be acceptable under globalisation’s rules but we also need to ask ourselves if the traction that the rupee is getting is natural.

Perhaps it is time to consider if foreign exchange is indeed “precious” — a tiring tag that has been applied on forex for decades now. Describing foreign exchange as precious seems to me like wearing bell-bottoms all over again, while current fashions demand a different cut to the trousers.

The 1970s are gone, okay?

It is true that Indians are now allowed to even buy houses abroad and invest in stocks and shares, but alongside the lifting of some restrictions, we also need to think in terms of doing away with some biases. From an anti-export bias, things may have shifted to what I call the “blind forex bias”

when we term foreign exchange as precious in a hangover mode.

Sure, we need exports and sure we need to foot import bills and keep a strong position in forex reserves. However, this does not mean creating imbalances in the system. The best would be to let economic forces find their level. The blue rupee with Gandhi’s picture could be as good as the greenback with Benjamin Franklin smiling upon us.

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