Millennium Post

Who killed the Indian Rupee?

A national currency is a national pride. But, not in India. Not, at least, since its independence. In 1947, one Indian rupee was equivalent to one British pound. Today, the buying rate is around Rs 89 for a UK pound. The rate is dropping almost by the day. Once used as an international currency in several West Asian and African countries, the Indian rupee has long lost the trust of Indians, rich or poor. Inflation has been steadily eating into its vitals. The highly restrictive industrial policy, market protectionism, massive bureaucratic expansion and punitively high direct and indirect tax regime in the Nehru-Indira Gandhi era kept weakening the Indian currency. White money and transparent transactions were soon to compete with black market and shady deals. In less than two decades since independence, India’s non-convertible soft currency became a big national burden, prompting its first official-level devaluation in June 1966.

In fact, the government has been treating the national currency with disdain over the years. The control-freak, FDI-allergic Indira Gandhi-era caused further harm to the Indian rupee. It had been subtly and selectively demonitised on several occasions. It is devalued as well, both officially and subtly by allowing its free play. The currency refers to both coins and bank notes. The growing black-money circulation, organised hawala trade and fake money menace are a major threat to the sanity and sanctity of the Indian currency system. The neighbouring Nepal has banned possession and circulation Rs 500 and Rs 1000 notes. Officially, the central bank of a country alone enjoys the monopoly control over the ‘emission’ of coins and bank notes. In India, the country’s political administration indirectly controls both the Reserve Bank and the currency. That explains rupee’s travails.

Breaking all monetary ethics, the government and the RBI had openly withdrawn or ‘demonitised’ coins of one-paisa to 25-paise denominations in total disregard to national pride and concern of those living below the poverty line to whom small coins matter. In fact, as of 30 June 2011, coin denominations of less than 50 paise ceased to be legal tender. The government of India mints have stopped printing paper currencies of Re 1 and Rs 2 denominations. The printing of five-rupee notes too were discontinued for some time before it was partially resumed in 2009. There is no official explanation about the whimsical exit of India’s so-called legal tenders. In any other country, such actions would have created a social and political ruckus. But, not in India.

Going by the official attitude, it may not take long before 20- and 50-rupee notes are gradually replaced by coins. The process is already on to replace 10-rupee bank notes, the history of which dates back to 1864, when it was first introduced (even before the General Bank of Bengal and Bihar was established by the viceroy of British India Sir Warren Hastings). Five-rupee notes came later in 1872. For reasons best known to the RBI, the supply of most popular Rs 5 notes is choked across the country, while the demand for coins continues to far exceed their supply. The abolition of small coins and growing demand-supply mismatch of other higher denomination coins have led to great hardship to the public, especially the poor, daily wage earners and small traders.

By Indian logic, the United States of America, which boasts the world’s most traded currency, should have long discontinued one cent coins or the UK its one pence. Neither one cent, nor one pence by itself can buy anything. Yet, they are among the most circulated and sought after currencies in the domestic retail trade and transactions in the US and the UK. The UK pound sterling, the world’s fourth most traded currency after USD, euro and the Japanese yen, holds such a national pride for Britons that the country refused to merge it with Euro despite its being a very prominent member of the European Union. The British pound, which had been through many ups and downs, is inseparable from the country’s history and culture.

The Chinese renminbi (yuan) enjoys an iconic stature in the national economy and global trade of the People’s Republic. China, boasting the world’s largest current account surplus year after year and biggest dollar collection outside the US, does not allow foreign economic powers to fiddle with the fixation of yuan’s exchange rate. Ironically, till the early 1950s, the Indian economy was much stronger and more versatile than the newly-emerged communist China’s. Among the reasons of rupee’s free fall is the currency’s free float and foreign pressure.

According to the former RBI governor I G Patel, the first major devaluation of rupee in 1966 was totally engineered at the top level of the government. Sachin Chowdhury, the then union finance minister, had no clue about it until the last moment. It was said that Prime Minister Indira Gandhi had personally negotiated the rupee devaluation issue with the World Bank president in March 1966, three months before it was formally announced, and kept it from the finance minister and the cabinet. Rupee was devalued by 36.5 per cent to a USD. Post-devaluation, the USD appreciated to Rs 7.50 from its earlier exchange rate of Rs 4.76. Chowdhury resigned in disgrace. The Indian rupee was formally devalued again in 1991 by 19 per cent or to Rs 31.37 for a USD by the Narasimha Rao government, with Manmohan Singh serving as the finance minister at the instance of the International Monetary Fund and the World Bank. Presently, rupee stands almost 80 per cent devalued from its 1991-92 levels. No one in the government considers it a disgrace. Curiously, Singh’s cabinet is mainly blaming Greece and the euro-zone crisis for rupee’s current state.

The shameful existence of the Indian currency is not without a semblance of the lack of character and conviction on the part of our political leadership steering the affairs of the country. Few will disagree with one of the country’s best known money managers ever, Narayanan Vaghul, the former chairperson of the ICICI group, who blames the steady erosion of the nation’s core values for the gloomy environment of rupee’s declining status. He chides those who rummage through the ruins of the Athenian economic Acropolis to explain away India’s problem with its currency. 'What is hurting is that our core values are disappearing. It has been six decades of decline with the political, economic and industrial leaderships dropping in integrity,' sums up Vaghul, who thinks that the root cause of our financial crisis is that we have created derivatives without underlying assets in the form of ethical values.

It appears that a bunch of greedy power hungry politicians is prepared to do anything and go any extent to serve their selfish interest. To some of them, the value of the currency may be just about the weight of the metal or the thickness of the paper. It can be discarded and de-rated at will. Personally, they prefer to hold the currency in ‘black’ rather than in ‘white’, measure it in gold to hedge the risk and would like hawala dealers and participatory notes operators, not the RBI, decide on rupee’s exchange value and future.
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