| The one consistent lesson that history teaches us is that individuals and nations go astray when they think they are sui generic or unique. "India the Incomparable" was the notion we had in mind until the economic reforms of the early 1990s. No matter what the issue, we had an answer: India cannot grow because we are not a dictatorship; India cannot export even half as much as you could see from the tallest tower in Hong Kong because India was not an island economy. No need to compare ourselves with Korea because they were built by American foreign aid. And we can't compare ourselves with China because, they are, well, Chinese. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Times have changed "" so much that while India's per capita income was equal to that of China for a thousand years (until 1980), it is today only one-third. But we are beginning to grow, our confidence is back, and some might say that the dirty incomparable minds (and policies?) are back. Witness the recent discussion on the behaviour of the rupee, and where it should go. The refrain of most experts (including some members of the UPA government) is that what can we do when the whole world loves us so much. Look at all the capital flows into the economy; we can't just keep buying dollars, can we? Note the not so subtle implication; India is deluged by investors, but the rest of the developing world is not. We are unique; red blood does not flow through our veins; we are incomparable. Never mind that the rest of our competitors (all of them) are able to contain such flows, and the associated currency appreciation. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
For some of these domestic and foreign experts, a perusal of just a few numbers in the table should be sobering. The table shows the appreciation in the exchange rate that has taken place over the last year, plus the estimated current account surplus (CAS) for 2007. The latter is an index of pressure on the exchange rate; the more the CAS, the greater the pressure for the currency to appreciate. Countries are divided into two groups "" those that follow the Chinese model of development, and those that don't. The Chinese model of development is about not letting the currency to unduly appreciate.
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| Several conclusions follow. First, that India is not unique "" several other countries (besides us and China) face pressure on currencies to appreciate. Second, that all the five top surplus countries follow the China model: Singapore, Malaysia, Hong Kong, Taiwan, and of course China itself. Third, these five countries, collectively and individually, show the least amount of currency appreciation. Fourth, China model countries have a CAS average of 13 per cent of GDP, compared to a -0.2 per cent average for others not fortunate enough to have policymakers who can face external pressures. Fifth, the rupee is about the "strongest" currency in the world especially if you consider the fact that its current account is always in deficit. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| So why the pressure, and advocacy, of allowing the currency to excessively appreciate in India? An important lesson that economics teaches is that the key to any mysterious behaviour is self-interest. The clarion call for the desirability of an appreciating rupee is led by the foreign investors and foreign "smart" investment banks. When the inflation rate was high, they were advocating tighter monetary policy for the RBI (yes, the same guys who in their own countries brought on the sub-prime crisis!). This advocacy was consistent (convenient?) with higher riskless profits, "the mother of all carry trades": borrow in the US at 5 per cent, and obtain exchange rate appreciation of 5-10 per cent. And don't even bother about stock market appreciation! | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The US Fed has lowered interest rates by 50 basis points. Will the RBI follow? In India, the inflation rate has more than halved from above 6 per cent to 3.2 per cent. Export growth has slowed to a low single-digit rate from above 20 per cent earlier. The current account is in deficit. Industrial growth has declined by a few percentage points. So what are the foreign (and some domestic) experts expounding in print and on TV? monetary policy should still be kept tight in India, no room for the RBI to cut rates. And what do these same experts infer about China's cheap interest rate and exchange rate policy and export growth above 20 per cent, and GDP growth of 12 per cent "" China is not overheating, the rates are not too high, and it is definitely not an export-led growth economy! | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Why these dysfunctional, disoriented and dishonest views of the two economies? Perhaps because domestic interest rates in China are only 4 per cent, and India upwards of 10 per cent "" so little prospect of a direct carry trade for the foreign investors. Perhaps because currency has appreciated only half as much in China than in India, so India is a better sure profit country. Perhaps because the Chinese don't listen to foreign experts as we do; and perhaps because we get our ego boosted because the foreign investors are paying us so so much attention. Isn't that so so sweet? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Traditionally, and predictably, there is a close harmony in the interests of foreign investors and domestic borrowers of foreign currency. If the rupee appreciates by 5 per cent a year and LIBOR is at 4.75 (and going lower) then essentially one is borrowing at 0 per cent. So why wouldn't you advocate a strong rupee policy? | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest groups play an important role in all societies. It is appropriate for importers to lobby for an appreciating currency and exporters to lobby for a depreciating currency. The state resolves conflicts by not being hijacked by either group. It ostensibly acts in the best interests of the country. The apologists for a strong rupee have yet to present a better case than higher firm profits and lower GDP growth. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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