Currencies move up and down also for reasons other than productivity — like relative inflation rates, resource inputs and an economy’s attractiveness to foreign capital. If inflation rates are high, or capital is flowing out instead of coming in, or if trade shows a large deficit, then that country’s currency will lose value. In general, therefore, a better-managed economy will see its currency gaining strength, while poorly-managed ones will see the opposite. Over the past decade, for instance, the worst-performing currencies have been those of crisis-ridden countries like Argentina, Turkey and Russia. Brazil hasn’t done too well either.
The scope for gains in productivity is greater in an emerging market than in a developed economy (because of the possibility of catch-up), so a well-ordered emerging market should see its currency gaining not just against other emerging economies but also against those of the developed economies. And so it is that the Thai baht has gained significantly against both the dollar and the euro over the past decade, while the Chinese yuan has kept pace with a strong dollar. The ringgit has kept pace with the euro, while the Philippine peso has gained ground against Europe’s currency. In clear contrast, the rupee has lost significant ground against both the world’s major currencies.
Why should this be the case when the Indian economy has been growing faster than these economies, other than China? One explanation could be that most “tradeables” (manufacturing and agriculture) have not been doing quite so well. Another is that economic growth flows from several factors, including population growth, and does not necessarily imply “factor” productivity growth as well. Thus, close to half the Indian workforce is still engaged in the least productive of virtually all activities, farming — where incomes in India are only a sixth of the incomes in non-farming activities. Further, much of India’s exports continue to be from sectors where low labour costs are a major competitive advantage — as in diamond cutting and garments. In comparison, China has moved from toys and garments to higher-value-added activities like making robots and specialty materials.
It goes without saying that what India needs at its present stage of development is more labour-intensive activity outside of agriculture, so as to absorb surplus labour from agriculture. Almost any movement of labour from it to non-agricultural activity (like the construction trades, or serving tourists) will translate into productivity gain. The test of whether such transitions are taking place fast enough will show in what happens to the rupee over the next few years.
To read the full story, Subscribe Now at just Rs 249 a month
Already a subscriber? Log in
Subscribe To BS Premium
₹249
Renews automatically
₹1699₹1999
Opt for auto renewal and save Rs. 300 Renews automatically
₹1999
What you get on BS Premium?
-
Unlock 30+ premium stories daily hand-picked by our editors, across devices on browser and app.
-
Pick your 5 favourite companies, get a daily email with all news updates on them.
Full access to our intuitive epaper - clip, save, share articles from any device; newspaper archives from 2006.
Preferential invites to Business Standard events.
Curated newsletters on markets, personal finance, policy & politics, start-ups, technology, and more.
Need More Information - write to us at assist@bsmail.in