by admin | May 25, 2021 | Opinions
By Amit Kapoor,
The Indian rupee has been on a rising spree this year. Beginning from historical lows back in December-January, when the rupee had almost touched 69 to a dollar, it has risen to a two-year high of 63.5 in the last few weeks. Simultaneously, there has also been a growing clamour of voices that are vehemently calling for a moderation of the overvalued rupee.
The common argument is that an overvalued rupee implies that it is at a higher price than what would be deemed a more appropriate exchange rate. This makes the country’s exports costlier in the foreign market and imports cheaper in the home market. In other words, currency appreciation makes exports less competitive in the world markets and enhance the competitiveness of imports.
The “cost argument” for improving competitiveness is actually a very narrow way of looking at the issue.
First, the end goal of every nation is to raise the standard of living of its citizens. Keeping that in mind, devaluation seems counter-intuitive. If a nation devalues its currency, foreign goods become costlier and its own goods are sold at a discounted price in the world market. Prosperity simply cannot be achieved in such a scenario. Moreover, nations like Germany and Switzerland have experienced rising levels of prosperity despite having appreciated currencies. Their ability to compete despite being paid higher prices for exports and labour seems to be a more desirable national target.
Second, the idea that currency somehow determines competitiveness is grossly misconstrued. Competitiveness of a nation and the goods that it produces largely depend on the productivity with which a nation employs its resources, which includes its labour and capital. This is because productivity is the fundamental driver of a nation’s per capita income and, by implication, the key determinant of the standard of living of its citizens. Labour productivity determines wages while the productivity with which capital is employed determines the return it gives to its holder. Competitiveness, therefore, can be said to be fundamentally centred on the idea of productivity of resources and currency is hardly a determinant of that factor.
Third, there are more long-term implications with deliberate devaluation of the rupee for upgrading the economy. The expectation of a low exchange rate leads to price competition among firms and investment in price sensitive segments and industries. This deviates investment away from innovations that can enhance productivity, resulting in slower progress towards higher order competitive advantages. In such a case, devaluation may lead to pressures for further devaluation and kickstart a vicious cycle that could take a nation further from the idea of competitiveness.
Therefore, currency devaluation or revaluation might just be far more dangerous and less useful than is usually portrayed. On the other hand, instead of currency manipulation, the Indian economy has more concerning issues affecting its competitiveness that need immediate attention. Competitiveness is driven by productivity and productivity numbers in India are problematic both in absolute and in relative terms.
Multiple studies have noted that productivity in Indian manufacturing has fallen since the reforms of 1991. One that came out in 2011 said that the total factor productivity (TFP) growth for manufacturing activities has fallen from 1.88 per cent between 1980-1991 to 1.05 percent between 1992-2007. A downward trend is also reported for the unorganised manufacturing sector by most productivity studies.
Similarly, in agriculture, India’s productivity has been lacklustre at best. In a recent visit to Iceland, I was made aware of the fact that the country manages to produce 4,000 tonnes of tomatoes in a hectare of land. Indian farmers, on the other hand, only manage to get 18 tonnes of tomatoes out of the same amount of land. How can India compete in the world market with such gross contrasts in productivity? Out of currency revaluation and productivity, clearly the latter is a goal worthier of relentless pursuit.
India has never targeted productivity as a tool for achieving higher prosperity when it is, in fact, the key to raise the standard of living of the nation’s workforce. If productivity levels remain unchanged, the economy would grow in the same proportion as the inputs are absorbed. In such a case, the economy would grow in size but welfare would not. This is because the utility gained from an incremental output is equally compensated by the disutility of the incremental efforts expended. In more economic jargon, the marginal utility of the additional output equals the amount of labour and capital devoted to it multiplied by the real wage rate and the real rental rate of capital.
Clearly, there can be no social advancement without a rise in productivity. Therefore, India’s developmental policy and public discourse need to be attuned to the same page before a generation of unproductive labour finds itself a victim of misguided economics.
(Amit Kapoor is chair, Institute for Competitiveness, India. The views expressed are personal. He can be contacted at amit.kapoor@competitiveness.in and tweets @kautiliya. Chirag Yadav, senior researcher, Institute for Competitiveness, India has contributed to the article)
—IANS
by admin | May 25, 2021 | Economy, News
Mumbai:(IANS) Slide in the Chinese stock markets and yuan value dented the Indian rupee in the off-shore markets on Tuesday, as the Indian currency touched its lowest levels in the last 33 months at Rs.65.47 to a US dollar.
The partially convertible Indian rupee stooped to its lowest levels in the last 33 months during the intra-day trade on Tuesday. It closed at Rs.65.32 to a US dollar.
However, the impact of rupee’s decline was contained as the domestic interbank foreign exchange markets were closed on account of the Parsi New Year.
The Indian rupee had touched a new two-year low at Rs.65.33 to a US dollar on Monday.
The rupee had hit its lowest level in around 23 months on August 13 at Rs.65.23 to a greenback. It had ended last week (August 14) at Rs.64.99 against a US dollar.
Analysts predict that the ripple effect of Tuesday’s off-shore rupee movement to impact its standings in the domestic markets on Wednesday.
“The ripple effects are expected to impact the rupee movements tomorrow. However, the Reserve Bank of India (RBI) is expected to intervene in the case of a massive depreciation,” Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services told IANS.
“The slide in the Chinese markets by around 6 percent today had spooked investors. If the trend continues then we can see another round of battering tomorrow.”
Other major catalyst for the rupee’s fall has been the devaluation of yuan, intended to boost Chinese exports.
China’s central bank devalued yuan by two percent on August 11. This was the biggest devaluation in the Chinese currency since 1994.
The currency fell again by another two percent on August 12 panicking the world economy.
The measure to devaluate the yuan is seen as an attempt to arrest the implosion in the Chinese markets. Othere, however view it as an attempt to corner the international export markets from other emerging trading powers such as India and the Asean (Association of Southeast Asian Nations) grouping.
The move has strengthened the dollar value, which has negatively impacted major world currencies including the Indian rupee.
“The Indian rupee continues to react negatively to the Chinese yuan’s devaluation. The yuan has fallen by 4.6 percent till now since August 11. All the major Asian currencies are at their lowest levels since the Asian financial crises,” Anindya Banerjee, senior manager for currency derivatives with Kotak Securities, told IANS.
The world markets are fearful of the fact that the $10 trillion dollar-worth Chinese economy has the ability to dump unlimited amount of goods and services, thereby cornering the entire international exports customers.
“The Chinese have estimated that their currency is nearly 25-30 percent more expensive than its peers in the emerging markets. They have hinted at further devaluation but that kind of a move will be gradual,” Sharma elaborated.
Meanwhile, Banerjee pointed out that the international fluctuations has widened the RBI’s comfort zone regarding rupee’s movements.
The Reserve Bank has been pretty active in the forward purchase markets since the last 22 months. It used to sell dollars whenever the rupee crossed the Rs.64 mark and buys when it falls below Rs.63 to a dollar.
Though at a very short movement, RBI was seen comfortable that time with the rupee ranging anywhere between Rs.63.20-Rs.64.30 per dollar.
“Given the new reality of yuan devaluation, stalled reforms, deficient monsoon and high interest rates, the RBI’s comfort range will be some where between Rs.64.20-Rs.65.30 per dollar in the short term,” Banerjee said.
The RBI’s strong control over the rupee had given the currency strength and resilience to withstand international financial crisis like the recent Greece debt issue.
Experts further cited factors such as a sharp fall in July trade data, deficient monsoon rainfall and diminishing hopes of a rate cut coupled-with the upcoming decision on interest rates by the US Fed as other major reasons for the rupee’s slide.
by admin | May 25, 2021 | Business
Photo Credit: FinancialExpress
By Rohit Vaid
Mumbai:(IANS) Devaluation of the Chinese yuan and the Indian rupee, as also the stalled reforms process, dampened investor sentiments in the equity markets during the weekly trade ended Aug 14.
The barometer 30-scrip sensitive index (Sensex) of the S&P Bombay Stock Exchange (BSE) fell by 169.08 points or 0.59 percent during the weekly trade, ending at 28,067.31 points from the previous close of 28,236.39 points on Aug 7.
The S&P BSE Sensex had marginally gained by 121.83 points during the weekly trade ended Aug 7.
“The devaluation of yuan is a sign that the currency wars have started at a time when the world economy is stalling, commodities prices are falling and the Chinese markets are bleeding,” Anand James, co-head, technical research desk, Geojit BNP Paribas, told IANS.
“The yuan’s surprise devaluation also stroked fears of competitive devaluation across Asia, especially before the (US) Fed’s monetary policy decision due in September,” he added
The yuan has fallen by 4.6 percent since Tuesday, its biggest devaluation since 1994.
The devaluation, intended to boost exports, has made investment in China cheaper, thereby leading foreign funds away from India.
This also impacted the rupee, which on Thursday fell to its lowest level against the US dollar in 24 months at Rs.65.23.
The logjam in parliament and the yuan’s devaluation led the markets to lose a total of 724 points during the first three trading days of the week.
However, investors were seen hopeful of a rate-cut based on healthy macro-economic data points including Consumer Price Index (CPI), Index of Industrial Production (IIP) and Wholesale Price Index (WPI).
“The recovery was led by the 0.05 percent rise of the yuan (on Friday), after three days of depreciation instigated by the People’s Bank of China, and better than expected macro data,” Rahul Dholam, senior analyst with Angel Broking, cited to IANS.
The macro-economic data points showed a fall in India’s annual retail inflation rate to 3.78 percent in July, the annual wholesale inflation fell to (-)4.05 percent, however there was a rise in the factory output to 3.8 percent in June.
The WPI coupled with consumer price index (CPI) have pointed at a gradual reining in of prices.
The RBI has set a target for CPI inflation at 6 percent by January 2016.
On the bright side of the volatile weekly trade was the possibility that the government might extend the “Monsoon Session” or call for a “Special Session” of parliament to pass the GST bill kept investors optimistic about the future of the key economic legislation.
“The signals that are coming — like an extension of the monsoon session or a proposed special session to get the GST bill passed — are very encouraging,” Devendra Nevgi, chief executive of ZyFin Advisors told IANS.
“The India growth story is based on the ability of the government to bring in reforms. For the central bank to be able to cut rates and usher in the demand by propping-up the consumer sentiment. The lack of reforms will send a dampening signal to the rest of the world,” Nevgi elaborated.
Lately, investors have been reluctant to chase higher prices given the possibility that the reform process might be stalled due to the government’s inability to conduct business in parliament.
(Rohit Vaid can be contacted at rohit.v@ians.in)
