Millennium Post

Falling rupee adds fuel to fire

Indian Rupee (INR) has once again slipped past 56 per US Dollar (USD), for the first time since September 2012. The foreign exchange market trend, which reflects the overall movement of the country’s key economic indicators, suggests that INR is likely to inch closer to 60 per USD before the next year’s scheduled Lok Sabha election. The forex market continues to stay depressed as the economy is showing no sign of immediate recovery and the local demand for USD far outstrips its supply. There is no move on the part of the government to contain imports, especially the import of luxury items of consumption, to restrict unnecessary pressure on foreign currency stocks and outflows.

In 2004, after the Congress-led United Progressive Alliance (UPA) government came to power, the exchange value of rupee was around 41 for a USD. The Indian currency has since depreciated by nearly 38 per cent. Barring brief interim breaks, it has been continuously sliding. Rupee has clearly fallen into bad times. Massive fiscal and current account deficits and domestic inflationary pressure in recent years added to Rupee’s woes. The falling value of Rupee has been raising the costs of imports of essential items such as fuel (oil and coal), fertiliser and food (edible oil and pulses) among others adding to the suffering of the common man.

Thanks to the government’s liberal economic policies, India’s list of wealthy is growing bigger and wealthier. Ironically, their wealth is growing in the inverse proportion to Rupee’s exchange value. The 2013 Forbes’ list has as many as 55 Indian dollar billionaires, the fifth largest group in the world after the USA, Russia, China and Germany.  In fact, the country has stolen a march even over China as India’s rich are far richer than China’s. The Forbes list shows that the top 40 Indian billionaires have a higher networth at $106 billion as compared to their Chinese counterparts’ well below $ 60 billion. The link between the falling Rupee combined with shrinking economic growth and growing Indian wealthy sans logic and is quite puzzling.

It is said that a person’s wealth is often in inverse proportion to his happiness. It means the more money one has, the less happy one is. The idiom would rather appear idiotic under Indian circumstances where the wealth of the rich grows in tandem with the eroding buying power of the national currency. Seemingly, the Indian rich are the happiest of the lot. Succession struggle in family managed corporates is rare, barring well publicized incidents involving the Mafatlal family some 30 years ago, followed by the acrimonious split in the Bhai Mohan Singh family of Ranbaxy fame and the feud between the two Ambani brothers after the death of their legendary entrepreneur father, Dhirubhai. On the contrary, the falling currency value is making the poor poorer and invariably unhappier.

The Indian wealthy could be unhappy in a way that corruption and lopsided economic liberalization policies are now getting too much public attention tending to slow down the speed of their fresh wealth hunt. India’s wealthy – businessmen, movie stars, middleman and fixers of all sorts among others – no longer fancies swanky cars, farm houses and villas in the age of sleek business jets, private islands, luxury yachts, exclusive designer resorts and roof-top helipads. Until the UPA government was installed in 2004-05, there were just around three dozen private aircraft in India. The last nine years witnessed an exponential growth of the number of private aircraft – 515, in all, including 257 fixed-wing planes and 258 helicopters. Indian billionaires own some of the world’s most expensive private jets.

For instance, Mukesh Ambani, the country’s wealthiest businessman who is also among the world’s top 10, boasts a $ 73-million ‘Boeing Business Jet 2’ (BBJ2) aircraft having a perfect mix of grandeur and state-of-the-art technology. Powered by two General Electric/Snecma CFM56-7 engines, the BBJ2, in full tank, can cover an astounding 6,616 miles, with a top speed of Mach 0.82. It sports a boardroom with plush executive seats. Mukesh has other varieties of aircraft as well and frequently flies an older version of Global Express.

Put simplistically, the value of a currency like any other products and services is determined by its demand and supply position. A country’s income and expenditure levels influence currencies. Higher demand for imported goods and lower remittances of income and investment from abroad increase pressure on foreign currency stocks and, also, weakens the local currency. Other than imports and exports, the factors that influence the value of a currency are inflation, unemployment, interest rates (on domestic and foreign commercial borrowings), industrial and agricultural growth rates, performance of equity markets, foreign exchange reserves, macroeconomic policies and data, foreign investment inflows, health of domestic commercial banks and insurance companies, commodity prices and geopolitical conditions.

Indian currency is becoming increasingly volatile among the world’s major capital-account non-convertible currencies. The country’s macro and micro-economic indicators are a major concern of the exchange market because of the economy’s heavy dependence on imports which is growing by the day.

The total annual servicing cost of external commercial borrowings and trade and balance of payment deficits far outweigh the Reserve Bank’s foreign exchange reserves, which are under constant pressure from increasing import demand and frequent profit-booking by FIIs in the volatile stock market. There is no immediate hope for a revival of Rupee unless the government comes down heavily on luxury imports, which combine only next to the oil import in value terms. IPA

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