In recent months, the Indian rupee has been in the news for wrong reasons. It has been weakening against the dollar. In other words, the rupee price of the dollar has gone up this year. It has gone up by around 14.5%. In contrast, in 2009 and 2010, this price had gone down by slightly less than 5% in each year. In 2007, too, it had gone down by 12%. In 2008, the story was similar to this year’s. The rupee price of the dollar had gone up by nearly 19%.
Clearly, exchange rates go up and down a lot year after year and the direction does alternate. So, it is not out of the ordinary to see the value of the dollar go up against the rupee. The difference between 2008, when the dollar went up by 19% against the rupee, and this year is that a lot of global currencies suffered a similar fate that year. This year, the rupee is one of the few that is under critical scrutiny by financial markets.
The weakness of the rupee is justified, unfortunately. In general, people hold a currency for its purchasing power. Inflation erodes that purchasing power. Persistently high inflation gives rise to expectations of depreciation of a currency that becomes self-fulfilling. The process by which this happens is beyond the scope of this 800-word column and can be found in elementary international economics textbook.
The problems of the rupee can, thus, be traced to India’s persistently high inflation in the last two years. What has caused inflation to rise to this high level in the first place? Inflation—or rising prices of goods and services—is due to insufficient production and rising demand, in general.
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When governments at the Centre and in the states promise to offer everything free to the citizens of India, someone has to pay. One of the editors of this newspaper put it more formally when he wrote that that the government of India has been busy converting private goods (users pay for them) into public goods (no one pays). Where does the government get its money from?
Either it taxes people to a greater extent or it asks the Reserve Bank of India to print more rupees and lend those rupees to the government. This government is doing both. The former discourages economic activity and the latter leads to inflation. So, inflation arises due to governments promising to offer everything free to the people because such an approach raises demand, and kills incentives to work and produce. This is not economics. It is common sense.
Should we blame politicians for these wrong and harmful decisions and policies that they follow? Let us examine our reactions when politicians attempt to do the right thing. Recently, the government of Tamil Nadu had to raise the prices of milk, electricity and hike bus fares. The latter had not been revised for 10 years. Members of the public were unhappy. Political parties, too, announced massive rallies and protests. The Hindu newspaper wrote an editorial calling for a partial rollback of the increases. From what I could gather—since I was in Tamil Nadu in the last 10 days—there were few exceptions to this general tendency to criticize the government for doing what it had to do.
Of course, it is possible for the government to avoid price hikes—up to a point—by cutting down wasteful expenditure and by making the government spend more efficiently and with accountability. How many of us hold it responsible for these things? We are happy with our free television sets, laptops, pressure cookers, wet grinders and mangal sutras.
If governments demand more out of their workers and sack them if they do not deliver, do other political parties support the government or do they find a political opportunity in siding with the sacked workers? Do newspapers and magazines support the government action or write emotional editorials about the thousands of families of government workers on whose future there is a question mark?
In the final scenes of the Tamil film Anniyan, the hero reminds his audience in a stadium that the problem is not bad politicians, bad bureaucrats and bad leaders, but us. If the weakness of the rupee holds a mirror to inflation, if inflation holds a mirror to our governments’ budget deficits, if budget deficits hold a mirror to our politicians’ hunger for power, their behaviour holds a mirror to our ignorance, to our willingness to fall for gimmicks and free goods, and to the poor quality of our public discourse on these matters.
In the process, all of us are mortgaging the future of our children and grandchildren. That is, we are borrowing their future for our present. So, who is responsible for the Indian rupee’s collapse against other world currencies? Is it the US? I do not think so. It is “us”.
V. Anantha Nageswaran is a senior economist with Asianomics. These are his personal views. Comments are welcome at email@example.com