Utkarsh Shalla
In October the Indian Rupee has slipped to a lifetime low against the dollar. Since the beginning of the year, the rupee has lost over 15% of its value in the foreign exchange market, making it one of the worst performing Asian currencies this year and worrying investors of the health of the Indian economy.
However, depreciation hasn’t been exclusive to the INR this year, several emerging market (EM) currencies have faced sharp declines in value such as the Turkish Lira, Argentinian Peso and the Russian Ruble. All EM currencies have faced volatility under the shadow of uncertainty in foreign markets due to the ongoing trade war between the United States and China; as the future of global supply chains becomes unpredictable for investors, they become risk averse and safeguard their investments in the historically trustworthy Dollar, especially after the Federal Reserve raising interest rates and planning to raise further in the future. Infact, countries facing severe socio-economic and political crises or disruptions have seen steeper depreciations than a relatively stable economy like India’s. Russia has been hit by economic sanctions from the UN and the United States, President Erdogan in Turkey has caused volatility in Turkish markets due to his ideological rifts with the central bank, Brazil is facing a heated upcoming election that can completely change the country’s future and Venezuela ofcourse has been hit by severe hyperinflation and social unrest.
Many have compared the current circumstances of the INR with the ‘free fall’ it was experiencing in 2013, as it lost over 17% of its value from April to August 2013. The global economic situation five years ago is remembered as the ‘Taper Tantrum’ when the Federal Reserve chairman Ben Bernanke announced that the Fed would stop the waves of quantitative easing (QE), purchasing bonds to pour money into the economy to lower interest rates, it had been using to sway growth after the ‘08 financial crisis. As soon as the announcement, investors took their money out of EMs as US bond yields and the dollar appreciated; the same EMs faced depreciations in their currencies, then known as the ‘Fragile Five’. However, although the chain of events is eerily similar, an overlook of India’s current macroeconomic conditions compared to those in 2013 does bring a different perspective. Then, India’s Current Account Deficit (CAD), as a percentage of GDP, stood at the high of 4.8%, inflation was reaching double digits at 9.8% and economic growth was sluggish at a mere 5.5%. On the other hand, now the deficit has been reduced to 1.9%, inflation has been kept in check at 3.5% with the help of responsible monetary policies by the RBI and the country’s economy is growing at 6.7%, with the International Monetary Fund (IMF) recently predicting the growth to reach 7.4% by 2019. Another factor to look out for is the price of oil, as India imports over 80% of its oil from countries like Iran and Saudi Arabia, global oil trends substantially affect the country’s trade deficit and investors’ expectations of inflation. During the Taper Tantrum, Brent Crude Oil had reached peaks of $110 also increasing India’s Current Account Deficit, while over the past five years it had dropped substantially and now stands at $80 per barrel.
The Modi Administration, recognizing public and investors’ outcry over the performance of the rupee, is said to have been considering import duties on nineteen goods and services especially like plastics and aluminium in order to reduce the country’s trade deficit, along with capital flow controls to stop the rush of investors away from India’s markets. The government wants to reduce the deficit by import substitution, by which tariffs and duties increase the prices of foreign goods and encourage domestic customers to buy goods produced in India. Even the RBI has intervened in the foreign exchange market by selling its dollar reserve, about $26 billion, to stabilize the rapidly changing value of the rupee, although reducing its large foreign currency reserves that it prided itself in accumulating over the past years.
However such an approach appears to be inadequate and shall only allow for market stability in the short run. The government must address the much more fundamental issue, which is the fall in Indian exports; recent RBI data has shown that Indian exports, as a percentage of GDP, have fallen by more than 5% over the past few years. Instead of trying to substitute domestic demands from imported goods to domestic ones, which is a difficult tactic as consumer purchasing habits don’t change so easily, it must look towards methods of expanding the country’s exports. Take the example of the Thai Baht, a currency that has for decades faced incredible volatility due to economic and political uncertainty, that has become the top performing Asian currency of this year. In 2013, the Baht was among the Fragile Five and was running a deficit of 1.3%, while currently its experiencing a Current Account Surplus of over 11%.
The Modi Administration must change its focus from import substitution to a comprehensive ‘Make in India’ plan that improves domestic industrial output. The Rupee has already depreciated enough to make Indian exports very cheap to European and American markets we must take this chance to spur an export led economic growth model that not only reduces out deficit but also allows for rising domestic incomes and job growth in a country where over a million workers enter the labour force every month.
(The author is studying economics and politics in New York University)
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