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Weak Currency is against the Interest of the Nation and its People: Professor JD Agarwal
Deepak Bansal | 29 Apr 2017

Weak Currency is against the interest of the nation and its people says Dr J.D.Agarwal, Chairman, Indian Institute of Finance.

According to him, if the currency is kept artificially low to give boost to exports through excessive intervention by the Reserve Bank of India, it results in cascading effects on the economy. Just to support one sector i.e. exports, one cannot ruin the whole economy.. 

In countries like India, where size of imports is much larger than size of exports resulting in heavy trade deficit, low value of the Rupee adds to the economic problems at both macro and micro level. Imports in India have inelastic demand and as such have to imported. For instance petrol, or diesel which is imported when the value of Rupee is low would affect the prices of petrol or diesel in the domestic market even if international prices of these products are low. This would put heavy pressure on inflation, quality of life of people, per capita income in dollar terms and also low GDP in dollar terms pushing India to low income country. Low value of Rupee in his opinion would also negatively affect the competitive ness of the industry and even exporters as it would push costs of material imported, cost of depreciation on imported machinery, cost of interest or dividend on Foreign direct investment said Dr. Agarwal.

Dr. Agarwal agrees with Commerce Minister, Nirmala Sitaraman, that Rupee cannot be treated as an anchor for exports. He strongly support the opinion of the commerce minister that the economy gets reflected through it currency. Fall in value of Rupee is seen to be the weak economy and affects the prestige of the country in the international markets. Of course fall in the value of Rupee benefits countries who are importers of Indian goods and services as these are available to them at cheaper price and considered to be of low quality because of low prices. According to Dr. Agrawal the Commerce Minister has correctly though implicitly backed a stronger rupee. She has righty said that export competitiveness is just not linked to currency but to better infrastructure and logistic which are the government focus areas.

Dr. Agarwal while questioning the statement of Chief Economic Adviser, Arvind Subramanian, stating,"It is misguided notion that strong currency rates are identical to national growth and economic strength" said it is right to say foreign exchange competitiveness is critical for growth but it is wrong when he  calls for rupee exchange rate that would promote exports. Dr. Agarwal feels that what Chief Economic Adviser states may be true  when a country has trade surplus, i.e when the size of exports is larger  than imports like in case of Japan or excess production capacity not consumable within the country.  

Dr. Agarwal strongly feels that keeping low value of Rupee for promoting exports i.e. a section of the whole economy is only to favour some against the whole society. This notion itself is fallacious, misleading, against the interest of people and the nation and holds no economic justification. However, keeping a low value of Rupee, suits Reserve Bank of India for showing a good balance sheet at the end of year as all foreign exchange reserves and other foreign assets are converted in Rupee terms to be shown in the Balance sheet. Low value of Rupee also suits Ministry of Finance, Department of Revenue for earning more indirect revenue on imports, as import duty charged is on rupee value and also central excise etc would be on rupee value of imported raw material. According to Dr. Agarwal, that is not the end result of any economic policy. It has to be beneficial to the economy and its people.     

At the macro level low value of rupee puts pressure on the government on GDP Value when measured in dollar terms as well as on per capita income. The country's image as a poor country is displayed when the value of Rupee is low than when it has its own market value. All the resources of the  country will be measured in dollar terms while calculated in Rupee terms. Low Rupee means lower value of the resources. The number of people below poverty line also go up (measured in dollar terms)  as the value of Rupee falls without having any effect on quality of life per se. Low rate of value of rupee is inflationary as imports of petroleum products and other raw materials add to the cost and result in cost push inflation opined Dr. Agarwal.

At micro level low value of rupees reduces cost competitiveness of firms. India being large market and has shortage of goods for its own domestic market. It is adversely affected as cost of production become high due to cost post inflation.  It is necessary to give Indian firms including export firms cost advantage which is eaten away by low value of Rupee. The industry including export firms need to concentrate on minimizing material cost, labour cost, overheads, including interest on debt, cost of capital and depreciation.  A low value of Rupee affects adversely these elements of cost negatively i.e. it would mean high material cost which is imported, high depreciation on cost for imported machinery and technology,  cost of foreign direct investment.

Lastly Dr. Agarwal strongly feels that low value of currency has a serious negative reflection on the strength of economy and also results into poor quality of life of its people due to high cost of imports besides affecting the image of a country.