Whether India draws an economic advantage from the ongoing global turbulence or not, a substantial political advantage can definitely be churned out at the moment. It is time for our leaders to rid themselves of their unfounded misconception on the exchange value of the domestic currency, that is, the rupee. In India, the BJP and Left parties have always been under the delusion that our national credibility demands a currency with rippling muscles. They have successfully conveyed it to the last man on the street that a weak rupee represents a grievous national sin. The BJP government, in fact, came to power showcasing the rupee slump of 2013 as a national shame – though a dynamic financial instrument like currency should not and cannot be an issue of national pride.
To be sure, in the presence of all factors that strengthen a currency, the fall in the rupee’s value is still striking. It is only logical to make use of this unique situation to disabuse ourselves of our moribund thinking on currency. One must accept Manmohan Singh’s logic which he narrated after the huge devaluation of the rupee in 1991: “The rate of exchange is just a price, and if you are in the business of selling, your price has to be competitive.”
Indian politics has been amazingly conservative about currency devaluation. Former Union minister Jairam Ramesh’s new book, To the Brink and Back – India’s 1991 Story, on the economically turbulent period of 1991 brings out interesting facts regarding the fixation of Indian politicians on the rupee’s value. In that period of crisis and reform, Ramesh was one of the economic advisors to prime minister PV Narasimha Rao. His memoirs reflect that although Rao was not as obsessed with the value of the rupee as the BJP had been, he was pretty uncomfortable about the rupee’s devaluation.
During the financial crisis of 1991, the then finance minister Manmohan Singh strategically got the rupee devalued by 7-9 per cent through the Reserve Bank of India (RBI) in the matter of three days. It was the largest devaluation of the rupee till then, and that too within 72 hours.
In those days it was the government, not the market, that determined the value of the rupee. Ramesh writes that Rao was so uncomfortable with the devaluation that on the morning of July 3 he called Manmohan Singh and directed him to cancel the second devaluation. Manmohan tried to reason with Rao, but the latter was not convinced. Eventually, Manmohan advised the then RBI Governor C Rangrajan at 9.30 that morning to hold it, but it was too late. The RBI had already issued implementation orders at 9am. Manmohan heaved a sigh of relief and conveyed the decision to Rao enthusiastically. However, the decision drew flak from party members and also the opposition for a long time to come.A lot changed between 1991 and the 2014 general election, but the inferiority complex of our leaders over the exchange rate of the rupee has not changed. Prime Minister Narendra Modi and finance minister Arun Jaitley must have realised by now that linking the rupee’s slump with an imagined decline of national credibility is ludicrous. Market experts read the jerks and jolts in rupee value on a technical chart. According to this chart, the latest slump to a two-year low, (September 7: 66.82/dollar) appears to repeat the free fall of 2013, when the rupee hit its record low of 68.80 against the dollar.
It is important to mention the landmark rupee event of 2013 because it was then that the political campaign to showcase the weakness of the rupee as the country’s weakness was launched. Crude oil price in 2013 was above $100 per barrel. Consequently the balance between the inflow and outflow of foreign exchange in India (CAD) had gone for the toss. It is only after the RBI’s battery of interventions that the situation could be improved.
Now, crude oil is hovering around just $44 per barrel, forex reserves stand at a record high of $355 billion, inflation is decreasing, trade deficit is shrinking, the gap between foreign inflow-outflow has been reduced too. Yet the rupee, instead of a massive surge, is tumbling the same way as it did in 2013. Yet, there is no concern or fear amid market participants. This proves that the currency is a dynamic financial instrument, which should not be seen through the mirror of emotional nationalism. It has to represent economic realities.
Most of the emerging market currencies have fallen against the dollar except the Philippine peso, the Thai bhat and the Indian rupee. Domestic currency has grown stronger compared to other competing currencies in the monetary export market. Thus the rupee melting to 66-67 versus dollar is not a big deal. This devaluation will help make exports more competitive. If Jaitley has to defend himself, he might put forth these points, but this explanation will reflect nothing but Manmohan’s logic in 1991. As mentioned by Ramesh in his book, Manmohan, in his reply in the Rajya Sabha over the rupee devaluation of 1991, said that the British wanted to keep India confined to the role of an exporter of basic raw material. They did not want India to industrialise. That is what gave rupee a legacy of being a strong domestic currency.
Technically, by advocating a perennially strong rupee, the Modi-Jaitley duo has been supporting British colonial economic policies. A fall in the rupee is neither a sin nor an insult to the incumbent government. If you are in the market you have to be competitive. If balanced currency devaluation makes us modern and competitive, it can never be anti-national. Will the BJP subscribe to this logic?(Article first published in dailyo.in)