The external value of the rupee has become a matter of political debate, which is fine. What is not fine is that positions should be taken on the basis of historical fiction. It is bad enough that Narendra Modi, the Bharatiya Janata Party's (BJP's) all-but-formal candidate for prime minister next year, should articulate more than once the mythical "fact" that has been floating around in the cyber world that the rupee was equal to a US dollar in 1947. That supposed parity has subsequently found its way into some newspaper articles, and was repeated by parliamentarians taking part in a Rajya Sabha debate last week. The regret is that the finance minister, who should have known better, gave this mythical rupee-dollar parity new life by confirming it as fact ("Of course, it was in 1947 that one rupee was indeed equal to one dollar").
For the record, the rupee was never equal to the dollar, except perhaps in the hoary past. At the time of independence, India's currency was pegged to pound sterling, and the exchange rate was a shilling and six pence for a rupee - which worked out to Rs 13.33 to the pound. The dollar-pound exchange rate then was $4.03 to the pound, which in effect gave a rupee-dollar rate in 1947 of around Rs 3.30. The pound was devalued in 1949, changing its dollar parity from 4.03 to 2.80. India was then a part of the sterling area, and the rupee was devalued on the same day by the same percentage, so that the new dollar exchange rate in 1949 became Rs 4.76 - which is where it stayed till the rupee devaluation of 1966 made it Rs 7.50 to the dollar and the pound moved to Rs 21.
The BJP has made currency value a political issue because it wants to argue that the currency's decline testifies to poor economic management by the government. Currency value does of course denote economic strength (China's yuan, for instance, has been appreciating in value in recent years), but the worst outcome of the debate would be to reverse cause and effect and posit that a strong currency would somehow make India economically strong. As Mr Chidambaram has done well to point out in the Rajya Sabha, the debate on the currency "should not become a debate about the pride or prestige of our country… We have to address the fundamental issues … [the] fiscal deficit and the current account deficit". Indeed, most countries that grew rapidly in the past did so by deliberately undervaluing their currencies, as China too did until fairly recently.
In historical terms, the rupee's fall during the life of the two United Progressive Alliance governments taken together (from Rs 45 to Rs 62 for the dollar) is par for the course. Indeed, the current account deficit has grown to gargantuan proportions in recent years precisely because the rupee-dollar rate was the same in 2000 as well as in 2010. With higher inflation rates in India than in all developed and many developing markets and a currency that did not depreciate to reflect the inflation differential, Indian exports simply became uncompetitive. The correction in the rupee value gives exporters a new lease of life. If he understands economics, Mr Modi should welcome the rupee's fall as overdue, not criticise it. If the BJP wants a strong India, it should demand a weak currency.
