| Why the double, differing and wildly divergent models for assessing the value of the Indian rupee and the Chinese yuan?
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| India's exports grow 35 per cent in October 2007. As unknown export growth came out of the woodwork, so did champions of the Indian rupee. The table presents all the available data, and some extrapolations, of exports for this fiscal. What these data make clear is not only that all is not well in export land, but actually the man (read the UPA government) made policy of a strong rupee has been an absolute disaster. Non-petroleum non-unclassified exports are down by -4 per cent over the last year. Non-oil exports for the same period are up a zero per cent.
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| Yet there are ever more strident calls for an ever stronger rupee. Just recently, the Indian Finance Minister, Mr P Chidambaram, distinguished himself as the only politician in the world to exhort his citizens to be prepared for a stronger currency. To be sure, the Americans have been doing the same. But there is a 40 per cent depreciation of the dollar from its peak a few years ago. Indians are not just argumentative, they are also truthful.
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When the FM speaks, foreign investors listen. And emboldens them to make ever more silly forecasts. It is a race to the bottom. In the race are major investment banks like UBS, which said in September "robust capital inflows and a strong rupee are not out of line with a need for tight monetary conditions". Such conditions are presumably needed to accelerate our declining GDP growth; India is one of the few major emerging countries to have a slower GDP growth rate in 2007 than 2006. The UBS forecast: Rs 38/$ in three months. Not to be outrupeed, Standard Chartered Bank Chief Economist Mr Lyons got even rasher: 30 in five, he said. This at the CII World Economic Forum in New Delhi. From all accounts, the distinguished guests nodded in agreement, and ill-concealed pride, at the forecast of Rs 30/dollar in 2012.
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ZERO INDIAN EXPORT GROWTH ""
but a stronger rupee is desirable! | | |
In Million $ |
% Change | |
2006 |
2007 |
in $ |
in Rs | |
April-June | |
A. Exports |
29081 |
35088 |
20.7 |
8.9 | |
B. Petroleum Products |
4430 |
5589 |
26.2 |
14.4 | |
C. Unclassified Exports |
994 |
4015 |
303.9 |
292.1 | |
Derived from above: | |
Non Petroleum Exports (A-B) |
24651 |
29499 |
19.7 |
7.9 | |
Non Petroleum Unclassified
Exports(A-B-C) |
23657 |
25484 |
7.7 |
-4.1 | |
April "" August | |
Exports |
50302 |
59435 |
18.2 |
6.4 | |
Oil-Exports (April-May) |
2407 |
3971 |
65 |
53.2 | |
Oil Exports
(April-Aug, estimated) |
6018 |
9928 |
65 |
53.2 | |
Non-oil Exports(April-May) |
16230 |
19248 |
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Non-oil Exports
(April-Aug. estimated) |
44284.5 |
49507.5 |
11.8 |
0 | |
Source: : DGCI&S.
Notes: The April-May figures have been extrapolated to April-August by assuming the same rate of growth for the five months as for the two months April-May |
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| I want to take such forecasts seriously "" possibly for the last time. Indian inflation has exceeded US inflation by an average of about 2 per cent per year, or 10 per cent in five years. So what Standard Chartered is really forecasting is a Re/dollar exchange rate of 27 in 2012. This would represent a 40 per cent appreciation (from 45 in 2006) in just six years. Has it ever happened before in any non hyper-inflation developing country? No. What about developed countries? Yes, Japan after the Plaza agreement of 1985, when the yen went from 239/$ in 1985 to 135/$ in 1991. And we know what happened after that. We also know about extravagant forecasts. When the yen was 80/$, investment banks were saying that 40 was a fair price. Today, they are saying that 2$/euro is where the world is headed.
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| This is not to say that no country's currency should appreciate more than 40 per cent in the short space of six years. It matters, and matters greatly, what the initial exchange rate is before the move and how much the exchange rate is undervalued. Which happens to be the Chinese yuan today, as it has been for the last few years. In contrast to India's deficit of 2 per cent in its balance of payments, China has a 12 per cent surplus. Its exports (in yuan terms) are up 20 per cent, compared to zero for zero-inventer India. Essentially, perhaps because they don't want to offend the Chinese government and put their multi-billion dollar M&A and FDI and FII profits in jeopardy, the investment banks are either strangely silent or outright apologists for the extreme yuan undervaluation. Global imbalances were a US problem yesterday, a European problem today. China is not an export-led economy, its currency is at best 0-15 per cent undervalued.
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| In the same breath, the experts view zero Indian export growth as a problem caused by a too weak rupee! A stronger rupee is needed because of our need for infrastructure, or because the Indian economy is growing too fast (read overheating, a policy echoed by some Indian experts as well). The banks and their experts have a clear strategy: preserve and increase undervalued profits in China; and increase over-valued profits in India from a "co-ordinated" speculative attack on the rupee. The strategy is clear: an impotent Indian Government is a much better target than a scary Chinese government! And some profits are desperately needed to finance the $300 billion or so of sub-prime losses.
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| But is it just the investment banks seeking quickie foreign exchange speculation profits who are to blame for our mad rupee policy? Maybe we caused it all. In March, when the rupee was allowed to appreciate, the government felt that it could arrest food inflation by currency appreciation; or that increasing oil prices should be absorbed by a rising rupee, rather than falling oil taxes. (We have among the highest, if not the highest, fuel tax rate in the developing world.) Instead of seeing a rising savings rate (from 23 to 35 per cent in five years) as a sign of strength, we saw it as a weakness and termed the accelerating GDP growth as a classic example of overheating. The foreign experts are just echoing what our own expert policy makers have said.
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| The writer heads Oxus Investments, a New Delhi based consultancy and portfolio management firm. ssbhalla@oxus.in |
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