Poor Indians, we! The dollar's recent surge against the rupee has brought to the fore one crucial fact – it makes us poorer. How?
By the simple fact that the rupee is losing, and has lost, “purchasing power”; or how much it can buy (in the international market). The “value” of our currency is not enough to buy more goods in dollars, or more dollars itself. In the last two years, the rupee has plunged 30 per cent against the dollar. That means that we have to shell out 30 per cent more to purchase things that can be had for a dollar.
To flip the point, it means we have to earn 30 per cent more rupees just to have the same dollar. As we pay more from our pocket, we are paying more of our money and spending more of our wealth as we import foreign goods, especially for an import-heavy country like India. This puts more pressure on our external accounts over the long run, which results in more rupee depreciation – and more poverty.
Consider this. Over the last two years, Indian rupee millionaires have seen their wealth shrink in dollar terms. If you had a net worth of Rs 4.4 crore two years ago, you would have been a dollar millionaire. Today, that same Rs 4.4 crore would be worth just $ 0.75 million. The depreciation has shaved off 25 per cent of a millionaire's net worth in dollar terms.
Some businessmen say that a depreciated rupee would boost exports and earn us more dollars. That's not the complete picture. Sure, in the short run there's more revenues flowing into the country. But because our currency has depreciated and our goods become cheaper does not mean that we have made real gains. Currency arbitrage for exporters might bring in profits in the short term, but is not doing us real economic good and not adding value to our economy.
Boosting of our exports should be based on innovation and productivity. We should rather export superior products to the world and charge more and earn more dollar revenues. We should license out technology and increase our profits. A competitive advantage that stems from superior products should be our key dollar earnings driver. Not mere arbitrage revenues that spring from a falling rupee.
Not surprisingly, Reserve Bank of India governor Duvvuri Subbarao made a valid point when he said that the depreciation of the rupee does not imply competitiveness. "It is somewhat misleading to believe that we can get export competitiveness from our exchange rate. We need to get the same by increasing our productivity and competition in other ways but not by exchange rate. However, I am not taking here any stance on whether rupee depreciation is good or bad," he said when delivering a lecture recently.
This is a time when we should be investing in technology and innovation, and boost our GDP through better and higher productivity and superior products. This in turn will help get more revenues through taxes, which in turn reduces fiscal pressures and helps strengthen our economy - and our rupee. Right now, we are going in the opposite direction.
