The Weaker Side of a Stronger Rupee

When I wrote about a Stronger Rupee in mid 2007, some opposed an appreciating rupee – a rupee that was getting stronger against US dollar. Why? Because Stronger Rupee hurts exports. For instance, IT companies which used to get 44 rupees per every dollar they earned, now get only 39 rupees per dollar. This is because Rupee is becoming stronger day by day.

Reserve Bank of India intervened a number of times, and still continues to do so, to try and keep a check on the appreciating rupee. What RBI does is buy out billions of US dollars, which creates a temporary shortage of dollars there by increasing its demand, which in turn strengthens the dollar. After a few days there will be again a large inflow of US dollars into India, and again the Rupee becomes stronger, and again RBI interferes and buys out US dollars to keep the rising Rupee under check. This has become a routine now!

In the first nine months alone last year, the RBI bought around 52 billion US$ to keep rupee under control. Doesn’t RBI want Rupee to become stronger? Well, RBI does not wants the rupee to become stronger all of a sudden as it hurts exports. A sudden rise is like a bubble, usually linked to a smaller temporary phenomenon than to a broader picture and hence can be dangerous too if not monitored properly.

Innovation and quality is the key to future

There is inflation (rise in prices) inside India and this needs to be checked first. Because say for instance, the earnings of IT companies come down and at the same time property prices, cost of living, salaries etc are all on the rise, which means the IT companies cannot cut down on their costs either, so how will they make more profit? IT companies are just an example. Any export dependent business, whose exports are only based on low cost advantage will face the same issue in the longer run. How?

Increased exports in a country (say A) means booming economy, which in turn also means stronger currency + more spending power in the country due to increased earnings by exports, which means rise in prices (because people are ready to pay more), which in turn means increase in manufacturing costs, which means costlier exports, and if at this same time some other country (say B) comes with cheaper options for the same exports offered by A, then A will start losing business and its exports will come down and so does its economy!

But not always!

Japan for instance, even though its an export oriented economy, does not face this issue because Japanese exports are not based on the low costs of their products, but are based on the quality of the products they export. There are always people who will continue to buy Sony products, no matter how costly they are, because of their quality.

On the other hand for the Indian IT services for instance, if tomorrow there is another country which offers the same IT services at a cheaper rate than India, then Indian IT companies stand to lose, because their services are based on being cost effective for multinational companies from US and Europe. As Indian Rupee becomes stronger, the services offered by Indian IT companies wont be cost effective any more, because there will be other countries like China, Malaysia, Philippines etc coming up which can offer the same services at an even lower cost!

Which is why I had said in my earlier article that, Stronger Rupee is a fact, which is a phenomenon bound to happen in any growing economy and so instead of cribbing about it or trying to hold it weaker artificially, its high time that Indian industries move toward qualitative product oriented exports instead of low cost service oriented exports.

On the other hand it is the strengthening Rupee which has insulated us for a long period from the rising global oil prices. If the Rupee was weaker then the oil prices in India would have been even higher today. Petrol for instance would have been around 60 rupees per litre! Every time there is a rise in global oil prices, we hear our finance minister saying, we wont increase the oil prices yet! Why? Because a strengthening rupee is taking care of this to some extent. As rupee becomes stronger, imports will become cheaper, so does the crude petroleum oil which is our largest import.

Indian economic boom was triggered by the IT sector which grew massively due to the outsourcing of IT services, and this was mainly because outsourcing of jobs was cost effective for the american and european companies. As employment opportunities, standard of living, spending power, etc increased inside India, the other sectors also followed. The telecom revolution, retail boom etc are all direct results of the initial IT boom. Now due to all these factors, our economy is strengthening more as every day passes by, and it is but natural for the cost benefit (of outsourcing to India) to go down. Even if the rupee becomes 25 or 30 against dollar, still the cost benefits remain for the outsourcing companies, but what if even more cheaper destinations spring out across the globe?

Tapping the internal market

Another important thing that we need to do (which many do not realize at all!), is to take advantage of our great population of 1 billion plus, which is 1/6 of humanity. What a great market for any kind of business on this planet with over 60% of the population being less than 25 years old! If we succeed in creating a vibrant economy within India, we can remove a lot of dependency on exports and foreign investments. A stronger economy and a large market within India would mean that our companies would find it more profitable to sell cars and mobiles inside India than to export them, same about IT services too!

To control the rising value of the rupee RBI is piling up billions of dollars today. If tomorrow the value of dollar crashes, then so does the value of our foreign exchange reserves which we have en massed. Instead why cant we spend a good amount of these dollars to build world class infrastructure in the country. Before dollar goes down even further cant we give contracts to international companies to build world class infrastructure in India. Cant we give more loans, increase investments etc in friendly countries. Thats exactly what China is doing in African countries.

US today can do a lot of things by just printing more dollars since it is widely accepted. Which is why US is not worried about rising oil prices and inspite of higher oil prices it buys most of its oil, even though it has huge reserves of petroleum in Alaska for instance, which US wants to preserve for the future when rest of the world runs out of oil! As of today, simply printing more dollars will do. This is a very good strategy indeed!

Inflation – Weaker side of the Stronger Rupee

While it is true that internationally the Indian rupee is becoming stronger (especially against dollar), it is also true that internally inside India rupee is becoming weaker due to inflation (rise in prices).
What this means is that while the goods that we import from outside (ex: electronic goods, petroleum) will be cheaper because of a stronger rupee, things that we manufacture inside India are becoming costlier (ex: food crops, real estate etc) due to inflation.

So where does the benefits of a stronger rupee lie? The common man of India doesnt rely on imported goods. All the basic commodities like food grains,milk,vegetables etc are produced/manufactured within India and not imported (except for petroleum products). Hence it is the inflation that matters more to common man than the international value of the rupee. The common man on the streets of India is not interested in whether an i-pod costs less or not, but it does matter when a kilo of tomato costs more.

One of the reasons for inflation is the increasing gap in the income between those working in the booming sectors like IT, and those who are left out of this economic boom, especially those in the rural areas. This gap can be easily seen in the fact that, while in any of the Indian metros a gathering of 5-6 people in an average restaurant will cost a minimum of 1000-2000 rupees, on the other hand in most rural sides it never crosses even 100 rupees today! Why? Because those who are benefited by the economic boom are ready to pay any amount to buy stuff, while those who are not simply do not have enough money to meet even their basic needs!

An IT professional never asks the reason why suddenly in a restaurant the rate of a plate of vegetable rice has increased from say 80 rupees to 120 rupees within a month! Its a prestige issue for them to pay, no matter what the the rate is. When I asked about the reason for the price increase in a restaurant, people looked at me as if I was some strange creature not fit to be there! Its not a question of whether I can afford it or not, its a question of what impact my mindless overpaying will have on the rest of the society. I asked in a hotel to give a breakup of the costs of an item which according to me was exaggerately priced and I was laughed at! If people refuse to pay more than what it really costs (say about 25 rupees) then the prices will naturally come down to 25 rupees and then even those who have minimum income will be able to afford it. On the other hand if we pay 120 rupees then the cost will never come down, and other people with a minimum income will never be able to afford it!

How many people in India who are outside the booming sectors like IT can afford a dinner at a good restaurant today? Isnt it the dream of these people too to take their families for a good dinner or for a movie at a multiplex theatre?
Forget the luxuries, even the basic necessity like health care have become unaffordable to those whose income is not positively touched by the booming economy. When basic necessitites become unaffordable to a large section of the society, crime rates are bound to increase. We should remember that, every time an IT professional is robbed of his valuables during a weekend night in a lonely place in a metro, it may be indirectly linked to his overspending on goods which probably made things unaffordable to the thief. The thief wouldnt have probably done that theft if atleast the basic necessities were affordable to him.

As long as there are people willing to pay more, there obviously will be businesses which charge more and more to test the cost thresholds. If we are willing to pay more and more, there will be rise in prices and hence the inflation. On the one hand we have scores of farmers committing suicide unable to meet even their basic requirements and on the other hand we have people mindlessly spending without even worrying about its repercussions. A man with lower income will not be able to afford vegetables because they will be sold at a higher price to the restaurants where people are willing to pay more! I strongly recommend that all the urban restaurants, pubs and clubs be heavily taxed in an effort to contain inflation. Any place where the basic essential commodities are used but outside their essential purposes, should be heavily taxed to contain inflation and ensure that the essential commodities are affordable to be used for their essential purposes. A kilo of vegetables is more essential to a middle class family, than to a five star hotel and hence should be heavily taxed in the five star hotel, to ensure its affordability to the middle class family.

Another addiction is of credit cards. I learnt the lesson quite early and have given back all my credit cards and have retained only one with a bare minimum credit limit, to be used only when it is really required. Ever since I returned back all my other credit cards, my monthly budget has come down quite significantly, and I have hence become richer. When you buy more than what you earn, you enter into a trap, where you end up paying more than what it actually costs! The message to the youth from Warren Buffet, the world’s second richest man is, stay away from credit cards and invest in yourself!

Conclusion

While the stronger rupee is definitely good, it is also important that the internal inflation in the country be controlled and contained so that the benefits of the stronger rupee reaches all sections of the society. At the same time, increased innovation and quality is the key to future economic success.

Please do let me know if you feel that I have written some nonsense :) Have a great day!