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Millennium Post

Crisis of the falling rupee

The Rupee is falling. A moderate fall in the foreign exchange rate of Rupee is often considered to be a healthy sign of the economy facing adverse balance of payments, because its boosts the exports and foreign earnings correcting the balance of payment. But the present problem of Rupee is causing concern because of its chronic fall and continued instability. Still worse, the measures adopted by the regulator RBI have failed to support it.

Weak Rupee is creating havoc not only in the economy, but it is turning to be a major political issue as well. On economic front, it is causing inflation in the economy. Inflation has been a bane in our country for many years and in order to contain it, we are sacrificing our economic growth. RBI has checked liquidity of Rupee in Indian market through its hard monetary policy and it has dampened the sentiments of growth paving the way for weaker industrial production and even slowdown in the economy. Our efforts have been to fight the inflation to save the poor from its regressive impact. These efforts have so far failed.

Now the weakening of Rupee in International Market is raising the price of imported items. Crude oil and its products form a sizable part of our imports and their high prices, because of the weakening of the Rupee are fueling further inflation in Indian economy, because the rise in fuels prices has cascading effect on the general price line of the economy. To contain inflation further, the RBI may continue its hard monetary policy dampening the growth sentiments. Weakening of the Rupee is also widening the current account deficit of our foreign trade. Though, for our exporters, weakening of Rupee is a welcome sign, but the import content of our exports is also rising through the years.  With the high cost of production, the profitability margin suffers in foreign trade as well. Anyway, the enhanced exchange earnings through the exports are less than sufficient to fight the menace of adverse balance of payments.

Share markets are also reacting adversely in the face of Rupee crisis. Foreign Financial Institutions have invested a lot and these funds into the share markets are dubbed as hot money, which flies outside the country first in a possible economic instability.

So, we have problems on each and every economic front. The problem of Rupee is further fueling the fires. The measures adopted to tackle the Rupee problem has failed so far and talk is going on whether India is heading towards the days of 1991, which necessitated the so called New Economic Policies. Yashwant Sinha, a Finance Minister during the first half of 1991 during the crisis, says that we have already reached the days of 1991. If he is right, then we have reached the place, where we started 22 years ago.  But our Prime Minister does not think so. He has claimed that we are not in such a crisis stage and even he has promised that year 1991 would not be allowed to revisit again. What was the crisis of 1991?

It was mainly a crisis of foreign exchange reserves. We had only foreign exchange reserves, which was sufficient only to meet the obligation of the payment of three weeks of our imports. Right from the mid 1980s, India was pursuing a policy of foreign borrowing even to meet the expenses of revenue account of our General Budget. It is very dangerous for a household as well as a state to borrow to meet its consumption expenditure. It has caused the problem of our foreign exchange reserves, which necessitated the New Economic Policies and the so called economic reforms 22
years ago.

Prime Minister is right, when he says that we are not facing the crisis of 1991, because despite many problems, our foreign exchange reserves are comfortable at $280 billion but the PM is right only in respect of our foreign exchange reserves. The fact is that we are facing even more serious crisis. At that time, it was a crisis of external payment, now we are facing problem on almost each and every front. Inflation has become chronic. Perhaps no country of the world has seen this kind of ever lasting inflation. The fall of Rupee has taken horrible dimension. Our economy is many fold larger now and it is not easy to manage it in a way, that was possible in 1991.

In 1991, we had controlled exchange rate of Rupee. The rate of exchange was decided not by the market, but by the administrative decisions. Manmohan Sigh as Finance Minister during the second half of 1991 under Narasimha Rao Government, started the devaluation of Rupee through fiats. Devaluation of Rupee worked. It was done in phases and the situation of foreign exchange reserves started improving. The Hawala rate of Rupee used to be higher than the official rate of Rupee and there was substantial leakage of foreign exchange through Hawala rackets. Later on Rupee was left in the market to find its own value.

Bhim Rao Ambedkar, in his research book, The Problem of the Rupee, had talked against the fixing of foreign exchange rate of Rupee hundred years ago, when it (the Rupee) was facing crisis. When the Rupee was allowed to seek its own level in international market, then the problems of two exchange rate regime (official and hawala rate) came to an end.

But, if the slide of Rupee is not checked, we cannot prevent the problem of foreign exchange reserves. It is bound to be depleted sooner or later. That is why we have to create the environment to make Rupee strong. For this we have to look at each and every aspect of our economic polices. Economics is not an exact science, hence we should always be amenable to change the policies, which do not work. It is time to review the so called New Economic Policies, we are pursuing for the last 22 years. We should be even ready to change the direction of the policy in our national interest.
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