This is one of those cases in which the imagination is baffled by the facts. — Adam Smith
All money, Smith had observed, is a matter of belief. And so it would seem is the value of the rupee. Every few years the rupee makes headlines as it tumbles from stability to volatility. The journey from systemic somnolence to stated “concern” to panic depends on the velocity of volatility and the momentum of events.
India has had one or two major crises every decade and nearly all of them have arrived at the intersection of internal fragility and vulnerability to external shocks. Typically the narrative starts with a chorus of knowingness, assertions about the rupee being overvalued, the dire need for a correction et al. This is followed by a theorizing of benefits—a boost for exporters and a damper on imports The cause of a currency’s slide is never homegrown and is always a consequence of global factors. The normalisation of the abnormal then blends into the narrative—if you call your bank for travel dollars, most likely you will be told, ‘Can you wait till this Turkish issue blows over?’ This is followed by a ‘just in case’ phlegmatic posturing about the possibilities of Trumpism. As Alan Greenspan once said, anything can be a proximate cause for a crash, a fall or a slide.
The stance of any politico in India on the rupee is determined by where s/he sits. The political landscape, therefore, is littered with resuscitated debris of past utterances reflected in the many memes and dark humour about the rupee—like the one on dollar innerwear which seems to travel in a loop. Reason goes celibate, yielding room to banal references and whataboutery.
At the official level, typically the first response is to apportion all blame to global factors, and the hum is chorused across the system. The debate follows predictive clues—first denial, followed by acceptance, followed by obfuscation, and apparently one learned worthy performed verbal callisthenics and landed with a priceless juxtaposition—‘it is dollar appreciation, not rupee depreciation’ —of cause and consequence.
The facts will challenge belief, if not imagination. The rupee has slid over 10 per cent—from 63.24 in August 2017 to August 2018. For sure other currencies too have been hit. Among the BRIC peers, the Brazilian real has slid 30 per cent, the Russian ruble has slid 20 per cent, the rupee has slid 10 per cent and the Chinese yuan around 6.8 per cent. More pertinently, among the competing currencies in the export market, the Bangladeshi taka has slid less than 4 per cent, and the Vietnamese dong just above 2.49 per cent.
There is a reason why the phrase contagion has gained currency. As with the human body, in the economy too immunity depends on the health of the economy. For sure India has notched a place on IMF reports with 7-plus per cent of annual growth. High growth—and indeed the 8.2 per cent GVA recorded on the back of last year’s 5.6 per cent GVA—though has a fault line and that is India’s poor performance in exports.
India’s double-digit GDP growth under UPA I was founded on robust macros of 2003 and came riding global growth. Between 2004 and 2007—in the four calendar years—world exports averaged 8.1 per cent and India’s exports hit the twenties and averaged 19.9 per cent. Cut to the boom that followed the bust in 2008. Thanks to easy money or the politically correct euphemism ‘accommodative’ policies, global growth was revived. Between 2014 ansd 2017 calendar years, global trade grew at an average of 3.7 per cent whereas India’s exports grew by a miserable 1.7 per cent in the same period.
Popular opinion deems that a weaker currency drives exports. Does it stand the test of inquiry? In 2014, the dollar cost around 59 Indian rupees and it costs RS 71 in 2018. What does the data say? India’s exports touched $322 billion in calendar year 2014 as per the World Bank, and its GDP was around $1.8 trillion. In 2017, India’s GDP crossed $2.6 trillion but its merchandise exports are worse off and stalled at less than $300 billion. It could be argued that global conditions have been challenging. Equally, data tells us that Bangladesh’s exports went up from $30 billion to $35 billion; China averaged $2.2 trillion and Vietnam from $150 billion to $214 billion.
It is no secret that India has struggled to design a doctrine for exports. In 1990, China’s merchandise exports were just over $62 billion, and those of India $17.9 billion. How have they done? In 2017, India exported goods worth $298 billion while China’s exports were over $ 2.24 trillion. It is not just China. South Korea has grown from $65 billion to over $573 billion between 1990 and 2017. Indeed, Bangladesh has grown its exports twentyfold. Vietnam’s exports have spiraled from $2.4 billion to over $214 billion, and its per capita income has shot up from $130 to $ 2,170 while India’s per capita has moved from $380 to $1,820.
The genesis of India’s poor export performance is reflected in its imports and India’s competitiveness at home. This stems from the inability to dismantle the permission raj, clear the cobwebs that hinder competiveness, the prevalence of inspector raj, rigid labour laws, confusion and conflation of objectives on scale and employment, inadequacy of research, a reluctance to open FDI to enable induction of technology and best practices.
The slide in the value of the rupee is simply a reflection of the vulnerability and the risks of earning in rupees and spending in dollars. India’s boast of robust macros is dented and can be dented further. It is no mystery that this has short-term and long-term implications for the economy and for geopolitics. The failure to get the basics right is detaining India and is an invitation to yet another crisis.