Here are a few queries of a layman after feeling the heat of ground-level “market economics”. The same market which is euphemistically referred to by (expert) economists thus: “let market determine such and such”. Can the real, practising economists kindly clarify a few concerns? The first relate to Vice-Chairman Niti Aayog’s recent views as reported by media. “Let rupee find its fair value,” he said.
What is fair value? Who is to define and find it? It was reported that the currency should be allowed to find its “natural level” and Vice Chairman Niti Aayog called for a stronger rupee as a “falsifiable belief”. If that be so, another clarification is sought. Who should “allow” the rupee to reach its “natural level”? What is the definition of “natural level”? Does it imply that rupee thus far has been at an “unnatural level”? Too low? Or is it high, but not high enough or should it be higher?
Furthermore, why and in what manner can a view for a stronger rupee be termed as a “falsifiable belief”? Only for the sake of allowing “the rupee to depreciate to find its real value”? By doing away with the mentality of judging an economy’s strength by the level of its currency? Following this logic, are we to take it as gospel truth that the currencies which are strong are of no use and value in international market? And those with weaker currency rule the roost? Will it be wise to hold such a view? Which currency rules? Weak or strong?
The view of Vice Chairman, however, that “if the rupee appreciates, exports become expensive which will make our goods uncompetitive in international markets; and exports sector supports lots of jobs” is correct.
Correct, but only partially because the other part of his statement appears slightly out of tune with the larger, real picture that “if rupee strengthens, it incentivises imports and the rich to travel more”. This is highly debatable and controversial without doubt.
Theoretically there is nothing wrong with linking fruitful exports with weak currency for competitive price as a growth stimulant. However, the inherent flaw of such a view originates from the fact that India’s import traditionally far outstrips export thereby rendering disproportionate (higher) outflow of foreign currency in comparison with minus (negative) income of foreign exchange.
Let figures, instead of views and speculative statements, speak. If weak and devalued currency fetches more money for exporters of India, it axiomatically implies exorbitant, high price for imported goods for importers too. Since India is not China, things happen in a diametrically different way.
China is the third biggest exporter of the world with 11.10 per cent of total world exports (goods, services and income as in 2015), behind the Euro area’s 16.28 per cent and USA’s 12.72 per cent. India, on other hand, stands fourteenth with 1.85 per cent of total world exports. Clearly, therefore, India’s export earning with a depressed currency does not match the desired level of economic performance.
All the more because India’s import stands at 3 per cent of total world trade thereby rendering disproportionate outflow of currency to get the imported goods into the country. Weak Indian currency with high import and low export stands no chance with a China of humongous exports and controlled imports, a high export and lower import ratio which ensures high return of foreign exchange through indigenous manufactured product finding wide-acceptance in the world market. All through a devalued, controlled, yet stable Chinese yuan.
And there comes the importance of the stability of the country’s currency in overall perspectives of macro economics of the state. Exports per se, on the basis of depressed currency, are not the panacea. Different types of lessons can be learnt from different eras. First, that of USA of late 18th century and second, of 20th century, post-World War II Japan.
Alexander Hamilton, “the father of American industrial might”, was the first US Treasury Secretary in 1789. His was a modest, yet effective, method in the long run. “Hamilton defended protection on grounds of national security”. Manufacturing, an ‘industrial base’, was a fundamental pre-requisite: “Not only the wealth, but the independence and security of a country appear to be materially connected to the prosperity of manufacturers. Every nation, with a view to those great objects, ought to endeavour to possess within itself all the essentials of national supply. These comprise the means of subsistence, habitation, clothing and defence”.
Perceptive Kwasi Kwarteng in his book ‘War & Gold’ opines: “Hamilton realised the goal of national supply, or self-sufficiency, as justification for protecting duties or duties on foreign articles which are the rivals of the domestic ones intended to be encouraged”. Britain, USA, Japan, (now) China came up with self-sufficiency in mind unlike India which perpetually looks for outside help.
An “American system” was born in the 18th century; to the chagrin of Europe which protested “protection”. The unmoved US reply was simple: “We too are friends to free trade, but it must be free trade of perfect reciprocity”. Will India take note of this fundamental of international economics and commerce?
Fast forward to 1940s. World War II destroyed Japan. Victor rescued the vanquished. Joseph Dodge, ex-President, US Detroit Bank, took charge of Tokyo’s economics for three months in February 1949. Dodge followed basics: “sound currency, balanced budget, financial stability” and wrapped it up in tandem with “credit restriction and expansion of trade and production”. By vigorously limiting ‘credit expansion’ only to those projects which “contributed to the economy”, Dodge succeeded in no time giving Japan a balanced, rather than deficit, budget.
Parting gift of Dodge, however, was reform of the Japanese Yen, created in 1871, after restoration of Meiji rule in 1868, when 1 Yen equalled 1 dollar. Subsequently, Yen turned unstable and lost value fast, like the 21st century Indian Rupee, the fall of which began in June 1966.
In April 1949, however, Dodge decided on a “single exchange rate of 360 Yen to the $”. Despite massive under-valuation, Dodge saved Japan. The exchange rate remained rock steady and stable for 22 years from 1949 to 1971 thereby making Japan an export-led economics resulting in Tokyo’s astonishing rise to an economic power house from the 1960s to present day.
Coming back to rapid fall of Indian currency and the defence thereof, it would be advisable to learn lessons from countries which succeeded in improving their macro-economic performance rather than sticking to the “weak currency-export profit” syndrome.
That is short-term logic. Long-term measures, if at all, could be “balanced budget, depressed currency and reduced import”. Several long-term measures go on to make a nation economically strong. Not one “pick and choose” short-term measure. Without a stable currency India cannot progress and cope with the consequential rise in price of (absolutely) essential imported commodities. India’s imports far outstrip exports.
The writer, an alumnus of National Defence College, is the author of the recently published book, China in India.