EQUALISATION_OF_RUPEE_AND_DOLLAR
India is the10th largest economy in the whole world in terms of GDP. As it is always a race in currency exchange market for dollar versus rupee, every individual wishes that why can’t be a Re 1 equal to $1? This is the question quite similar to why can’t we just print money and pay all the debt? There are some pros and cons to the situation. Before going to pros & cons, let’s see what happens, if in overnight or in a very short period of time Re 1 equals to $1. First of all, the high value of currency does not mean the economy of the country is stronger. If that was the case Bangladesh would be a stronger economy than Japan. Because 1 Bangladeshi taka is equal to 1.4 yen [1 BDT= 1 YEN].
PROS
- Buying goods will be cheaper for Indians in international market because this will make imports cheaper which is quite good for a developing country.
- Buying luxurious goods will be very easy for Indians. Simple example is an iphone 7 will cost only Rs 650/- which is cheaper than the current market rate.
- As imports are cheaper, then petrol price will be cheaper resulting in transportation cost reduction in the country.
The above pros look quite good but this will not last long and also there is another side to the story.
CONS
- Exports will be quite expensive because Indian products will be expensive compared to other competing countries products. Why would any country buy things from India, if they can buy from other competing nations at a lower cost?
- There will be no foreign investment. The first reason for foreign investment in India is due to the abundance of cheap labour. Foreign companies will not be investing in India and take interest in other countries for cheaper labor.
- Investment in IT sector and service sector, which presently contributes in huge amount for the Indian economy, will vanish.
Now, as rupee is equal to dollar, no company would pay wages/ salaries in high ranges.. minimum salary would be Rs 75000/- per month. They can hire someone outside who will do the same work for Rs 15000/-. So, eventually, people will lose jobs which will increase unemployment, plus no foreign investments, which would result in a economic slowdown.
The outsourcing to India will be stopped. Also, the companies which are doing business in India, will start to move out as it will not be a profitable venture for them.
Similar situation happened in 2008 when dollar was quite strong and the imports were good. Then the BPO sector and IT sector suffered a lot. The situation of Re 1 equal to $1, it’s just not affordable for a growing or developing country.
Now you would think that we don’t need foreign investment and we will be using all swadeshi stuff only. That will also not work either. Until 1990, India focused on the same rule of using only swadeshi stuff. But economic growth happened only after 1990 when we let go of that idea. If we boycott foreign products or goods, then the other countries would boycott our products or goods resulting in reduction in exports, which is not beneficial at all. It is called protectionism which is completely opposite to free trade. Also less exports mean less foreign reserves.
Japan also suffered a huge economic loss when their currency was overvalued in 1986. China has the fixed rate system in which government decides the value of currency and they devalue their currency against the dollar all the time just to capitalize on export market, recently done in January 2016.
On the other side, India has adopted the floating rate system since 1975, where the finance minister, RBI Governor or the government cannot decide the value of currency. It is the market supply and demand of India’s goods and services, which decides the value of rupee. Our finance minister and RBI Governor are not worried about the falling rupee value but they are worried about the fluctuations in the market. The stabilization of the rupee value is more important. Today, if rupee value is 60 and tomorrow is 70, its too much fluctuation in a short time and not good for the economy. They might not be having deciding function on the rupee value, but they do have control over the policies and maintaining the foreign reserves of the country. Through this, they try to maintain the rupee value in a constant manner by controlling the inflation rate, so that the rupee value does not continuously depreciate.
As Indians, we do want our currency to be high valued but at what cost? The cost is too much and the main reason, as it is mentioned earlier, the value of the currency is not the scale to determine the value and strength of the economy. A Mile is equal to 1.6 Km, but if you have run for 16 Km it is equal to 10 Miles i.e. 16 Km= 10 Miles distance is the same. Eventually, the equalization of dollar and rupee will happen with the growing economic activities such as manufacturing and production, which are growing now at a higher scale. But equalization takes another 4 to 5 decades or more than that. It depends on the policies of both the countries.
MBA Final Year