THE SLIDE IN THE VALUE OF THE INDIAN RUPEE
In the midst of India’s current slow down in growth, India is said to be the third largest economy in the world. We are a developing economy that has now hit a set back with the strengthening of the dollar.
Few years back, India stood tall on both her feet, as USA was struggling. Americans pumped their dollars into other nations as their currency was weakening and they wanted to protect the value of their investment portfolios. This was due to the melt down of their economy. India was one of the countries where these dollars were pumped. Today, as the US economy is strengthening and is slowly starting to stand again, American’s want to invest their money back in their own country.
This has resulted in a shortage of a very important commodity, The US dollar, in India. This shortage has subsequently resulted in the value of the Indian Rupee falling.
Is this problem killing our economy? According to me the answer is no. Until and unless we keep the situation in check and don’t let it become any worse, our economy will be fine.
The easiest way to prove this is by looking at economic indicators. An economic indicator is simply any economic statistic, such as the unemployment rate, GDP, or the inflation rate, which indicate how well the economy is doing and how well the economy is going to do in the future. These indicators can be procyclic or countercyclic.
Procyclic indicators move in the same direction as the economy. So if an economy progresses, the indicator increases. An example of this indicator is the GDP. Look at the GDP of India, which has had a slow and minimal growth to 4.8% in the first quarter of 2013. Though the growth is minimal, the fact that there is growth shows that the Indian economy hasn’t gone to the dogs as of yet. It also shows our growth is sustainable and steady. Closely following the trend line in the business cycle.
Counter indicators; on the other hand decreases with a growth in the economy. For example, the unemployment rate. In India, the unemployment irate in 2011 was 9%, which became 3% in January 2012. The rate since then has not shown any significant rise, indicating, the economy is still growing.
So then why has such a big hue and cry about the value of the rupee been made? The big industries are getting hit as the depreciation of the rupee is resulting in losses when it comes to transactions done in the dollar, without hedging the currency risk.
A strong dollar increases the cost of essential commodities imported for the functioning of the economy, such as edible oil and crude oil. This is consequently leading to a rise in the prices of consumer goods and services in the country. These inflationary prices are making the day-to-day living expensive.
Take for example a company like GMR. If GMR borrowed a lot of money in US dollars to make the Delhi airport and construct all the elevated roads, the deflation of the Indian rupee would’ve hit GMR badly. This is because it will now have to pay back that money at Rs.61 to a dollar instead of Rs.45. To recover this, GMR may increase the tolls on its roads, which will make travelling more expensive. But this problem however isn’t a major economic problem. This is because the roads and airport aren’t affected by the value of the rupee. The roads and the airport is just better infrastructure, which benefits the economy.
Moreover, the problem of the deflation is more of a global problem than an Indian problem. India has little to no control over how strong the dollar will get. Therefore the problems that India should concentrate on, is not the value of the rupee but the inflation in the country and the development of the economy. India should look for ways to increase the amount of dollars she has. In other words, we must control our current and capital account deficit.
Current account is the difference between the net export and import of a country. We can control the...
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