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The intrinsic buying power of rupee
The RBI's measure to limit the USD holding in EEFC accounts may turn out to be insufficient to check the slide of INR. In order to increase the value of INR, productivity and innovating abilities of Indian companies should increase.

THE RESERVE Bank of India (RBI) on 10th May 2012 announced that from now on 50% of the balances in the Exchange Earner's Foreign Currency (EEFC) accounts should be converted into  Indian national rupee (INR). Exporters are supposed to do this within a fortnight and credit the funds to their INR accounts.

In November 2006, the RBI permitted the exporters to retain all their earnings in the USD. The step was taken to check the slide of the INR against the USD. In addition, the RBI sold some 550 million USD in March 2012 to revert the downslide of INR. The more important thing in evaluating a currency is not its exchange rate but its intrinsic buying power. The value of INR has been on constant decline and if it continues, desperate monetary measures to check its decline against the USD may appear cosmetic and insufficient.

It is true that India is heavily importing country and a strong INR is required to keep the current account deficit at manageable level. But selling the USD or putting conditions on EEFC accounts may not help the cause as the RBI may not have sufficient reserves of the foreign currencies to sell them into the markets and since this ability decreases with time, therefore, it is only a short-term measure.

Also, letting the companies sell half of their earned USD may decrease the competitiveness of the companies. The foreign companies because of integration of Indian economy with the world and because of readjustment of tariff and entry barriers are expanding both horizontally and vertically. The US and the rest of the West are doing it all over the world, particularly in the BRICS countries. That is why they are agreeing to the system of basket of currencies known as Special Drawing Rights (SDRs). Through SDRs while nations such as China, Russia, Japan and probably India would have more freedom to print their national currencies without much worry about inflation, the West, particularly the US, would have increased control over internal economic policies of those nations and it would expand at a higher rate.

Moreover, the bargaining would increase the influence of American companies worldwide. The American and other Western companies have huge balance in their INR accounts and through them they are increasing their say in the finance of the country. The Indian government needs to improve the competitiveness of Indian companies and urge them to invest more in R&D, thereby decreasing the dependence on foreign companies. As long as Indian companies do not invent new technologies themselves and do not make products without violating copyright laws, the intrinsic buying power of the INR and its value against the USD and other major foreign currencies would not improve much.

Controlling the imports is no solution either. First of all, it is not feasible as Indian government can not increase the import and excise duties in view of the economy getting integrated with the world economy. Nor it can ask consumers against the consumption as hurting oneself for any cause, be it hurting foreigners or supporting nationalism, is no sane step. Moreover, it could lead to shrinkage of Indian economy. The bottomline is that consumers can not beat the ultimate producers either by consuming their products manufactured in their own nations or importing their products, capital and technologies. High imports any way reduce the value of importing nation's currency and this is certainly true for a big nation like India. The value of the INR, both domestically and externally, can only increase by innovating abilities of Indian entrepreneurs and is possible when the INR becomes an Asian trading currency.

The fact is that nationalism does not always work. It certainly can not overrule laws of economics. India is such a diversified country with distribution so wide that no arbitrary diktat by the government can suddenly change the economic situation in the direction it wants. India is West-staked since its inception and it has no alternative either. The FDI-led growth has so many constraints and devaluation of currency in tune with the laws of markets is one of them. The government instead should support more investments by the foreign companies and promote technology sharing. For that it needs to improve upon the copyright and patent laws. If the INR's intrinsic value continues to decline it would hurt poor and would help rich and if the INR's external value is maintained same despite the decline in intrinsic value it would again help the rich more. It would add to asymmetries, distinctions and differences. Dealing with the inflation requires huger subsidies and higher taxation. Therefore, rich would be better off, poor would get some benefits and the middle class could suffer. It would lead to disbelief in Indian system and even middle class would dream about skipping India.

There is nothing wrong in supporting rich but there may be something fishy in hurting the poor. Anyway, the political executives should be frank about admitting it. The law is simple: the West would not suffer economically because of the measures taken by the Central Bank to artificially prop up the INR. If the West gets lesser INR for a particular export, it will get more stakes and increased say in Indian markets as a consequence of this. India can not import technology and capital from the US without importing inflation. Net imports can save erosion of natural resources but it makes dependency on ultimate producers and make nations more West-staked. The continued inflation would make Indians literally ideologically bankrupt though vocally nationalism and socialism and even communism would be on rise.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of merinews.com. In case you have a opposing view, please click here to share the same in the comments section.
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