Calcutta Notebook


In the last week of June, 2013, that is, between 24 and 29, the US$ has breached INR mark of Rs 60 for the first time. On 28 June the value of US$ fluctuated wildly before closing at INR 60.20. In this discussion the value of US$ is shown as rising which means a corresponding fall of INR. For example, towards the end of 1990-91 fiscal, the value of 1 US$ = 20 INR meant 1 INR= 1/20 US$ and now 1 US$ = INR 60 means 1 INR = 1/60 US$ and as 1/60 < 1/20, any increase in the value of US$ shall mean corresponding decrease in the value of INR. ‘The Statesman' dated Kolkata, 21 June, 2013, gave a graphic account of 330% free fall of Rupee from INR 18.11 in l990 to INR 59.97 on 20 June, 2013, that is, in 23 years. The graphics mentioned above shows that between 1991 and 1996 when Narasimha Rao was Prime Minister, the value of US$ rose from Rs 25.79 in 1991 to Rs 35.85 in 1996 which means a fall of the value of INR by 39% in 5 years which again is equivalent to a fall of 7.8% per year. Again, between 2004 and (20 June) 2013 during which period Manmohan Singh is Prime Minster, the value of US$ went up from Rs 44.00 to 59.97 —an increase of Rs 15.97—which is 36.29% in 9 years and that means a steady fall of INR by 4.03% per annum. In contrast Prime Minister Atal Behari Vajpayee's regime saw the value of US$ rise from INR 42.58 in 1998 to INR 44.00 in 2004—an appreciation in the value of US$ by 3.33% in 5 years—meaning sliding of value of INR by 0.66% per year. The brief periods of V P Singh, Chandrasekhar, I K Gujral and Deve Gowda as Prime Ministers have not been considered. Therefore the three periods sequentially are the Congress period (1991 to 1996), the NDA period (1998 to 2004) and the UPA period (2004 to 2013) during which the external value of INR depreciated at 7.8%, 0.66% and 4.03% per annum respectively.

Of these three periods, the first one witnessed a steep fall of INR. Previous to the beginning of this period the external value of INR was administratively set jointly by the RBI and the Ministry of Finance, Govt. of India in accordance with bilateral trade agreements between India and other trading countries, separately. This phenomenon results in anomalies and complications while calculating balance of payments. For example, a surplus balance on one account could not square up deficit balance on another account. Another difficulty was that not just often but almost always the administrative value of INR was considered arbitrarily set at a much higher end than its true market value leading to serious difficulties and complications in the Indian money market. With the opening up of the Indian economy in 1991 the value of INR was allowed to freely float for the first time and as a result the value of INR fell sharply primarily because at that time India had large backlog of trade deficit caused by excess of imports over exports incurred previously. The days of bilateral trade agreements as well as of bilateral collaboration agreements for investments of foreign funds in Indian industries are gone and with it India enters the era of free trade, that is, of free entry and exit for Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI). The common denominator for free international trade is US$ and the values of all currencies including INR must be determined with respect to US$ in the international foreign exchange (Forex) market which reflects the demand for a country's currency solely on the basis of performance in international trade. This Forex market, open and awake always around the globe, determines the external value of a country's currency at every instant. The steep fall of the INR during the first period was by and large precipitated by sudden exposure of the INR to the free Forex market as well as by the huge accumulation of trade deficit. This market determined steep fall could have been exploited for India's benefits had India's export houses succeeded in expanding the volume of export of Indian goods and services in view of the comparative advantage of the depreciated INR. But the docile export houses, used as they are to the captive export markets held before them by the previous bilateral trade regimes, failed either to maintain the level of export in their earlier markets or to explore new markets in other economies. Cashing in on the depreciated value of Indian goods and services in overseas markets due to depreciated INR, the Indian exporters could have increased the volume of export and thus could increase their earnings also by pulling the demand for INR up in the Forex market. This could also have raised the external value of INR. But the exporters failed miserably. This phenomenon has been explained by the existence of constraints owing to the still persisting permit and license raj. Whatever other reasons may be attributed, it is certain that the sudden opening up of the economy had caught the Indian export-import houses unprepared.

Vol. 46, No. 3, Jul 28-Aug 3, 2013

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