Over the past several months, the value of the Indian rupee has been declining sharply against the U.S.dollar. It went from around 44 rupees to 57 rupees per dollar, and stands currently at 55 rupees. What are the factors causing this decline? What are its consequences for Indian people?
A bit of History
The current decline in the value of the rupee is not the first such decline. Recently, when the economic crisis of global capitalism erupted in 2008, we saw the rupee plummet from 37 per dollar to 52 in a few months from late 2008 to mid-2009. Decades earlier, the government of India under the prime ministership of Mrs Indira Gandhi had officially devalued the rupee from 4.80 per US dollar to 7.50 on June 6, 1966, under pressure from the International Monetary Fund and the World Bank. Later, Manmohan Singh, soon after taking charge as finance minister in the minority Congress government of Narasimha Rao, had devalued the rupee by 22 % in 1991, more or less along the lines suggested in a World Bank document of 1990. But there is an important difference between the 1966 and 1991 devaluations, done officially by government, and what is happening since 1991. In the two instances that I have referred to, external pressure was brought to bear on the government to devalue the currency. Since 1991, neoliberal policies have ensured a continuous long-term decline in the rupee in relation to the dollar, without overt external pressure. Our rulers have internalised the World Bank-IMF dogma.
In the pre-1991 era, India did not allow capital inflows into India in the form of money unrelated to productive investment and primarily into the stock market to make quick profits. There were also significant restrictions on converting rupees into foreign exchange such as dollars. Since 1991, however, the government has allowed inflow and outflow of capital as finance with hardly any restriction in respect of foreign entities. Even resident Indians are allowed to take out of the country each year a maximum amount of 250, 000 dollars. Needless to say, only very rich Indians can even dream of doing this. Also, in the 1960s, the international monetary system rested on fixed rates of exchange among currencies of various countries, and changes could be made by a country onlythrough an official decision. In the current era, however, the rupee can change value against the dollar –or any other currency – on account of daily transactions in the currency markets. The value of a currency against another does not rest, as is often argued by neoliberals, on ‘economic fundamentals’, but is crucially affected by speculative inflows and outflows of capital as finance. An important element in the recent decline of the rupee is such financial speculation, constituting an attack on the rupee by key and big players in currency markets.
Impact of Neoliberal Policies
Since 1991, the Indian economy has been increasingly integrated into the world capitalist economy. In 1991, the sum of India’s exports and imports was just about 14 % of our GDP. Now, the figure is around half of our GDP. If one takes into account foot-loose capital inflows and outflows, the figure exceeds our GDP. With the world economy, and especially the US and Europe in doldrums, our export growth has been badly hit. Meanwhile, with import liberalization under the neoliberal policy regime, and abandonment of self-reliance in such key areas as petroleum, fertilizer and so on, imports have grown rapidly. The large deficits on balance of merchandise trade – that is, the excess of value of imports of physical goods over the value of exports of physical goods – have been made up in part by increase in net exports of services, mainly IT and IT-enabled services. Another part of the trade/current account deficit has been made up by inflow of remittances from abroad, mostly Indian workers in West Asia and elsewhere, and in more recent years, IT professionals temporarily resident in Europe and North America. But a key role has been played in filling the gap by inflows of foreign institutional investment, which targets quick gains in the Indian stock market and is a very volatile source with considerable fluctuations, being driven by speculation.
Currently, all these three sources of foreign exchange have become unreliable and inadequate. The global economic recession has hit inward remittances into India from both IT professionals and Indian workers abroad. The third source, financial inflows coming to make a quick buck on the stock market, has dried up quite a bit, with the financial crisis in Europe and USA. In addition, with inflation in India persistently high for over two years now, and large budgetary deficits, rating agencies such as Standard and Poor, Moody’s and Fitch have been discouraging foreign portfolio investors from bringing money into India or staying with rupee-denominated financial assets. This set of circumstances is encouraging a speculative assault on the rupee, which also contributes to a decline the rupee against the dollar.
The ruling classes and the government are panicking in the face of the decline in GDP growth rate and the decline in the value of the rupee. They are relatively unconcerned about aspects of the economic crisis, such as poverty, unemployment, agrarian crisis and rampant inflation in essential goods that hurt ordinary people. But they are worried a great deal about the growth rate and the rupee. They argue –with the help of the corporate controlled financial and other media – that the only way to revive growth and stop the decline of the rupee is to provide all possible concessions and encouragement to foreign capital to bring money into the country, both to stabilise the rupee and to increase investment. The government spokespersons, from the Prime Minister downwards, push for further liberalization and privatization of the economy, including allowing 100 % FDI in multi brand retail, allowing foreign airlines to own shares of domestic airlines, privatization of pension funds and their deployment, allowing foreign banks to take over Indian banks and so on. All this is being done, apart from reasons of corruption and kickbacks, in the hope that this will bring in money from abroad and revive the economy. This is an entirely anti-people strategy that will also not help revive the economy or stabilize the rupee. Is there an alternative? Yes, there is.
First of all, we must restrict the flow of finance into and out of the country. It is not just that we must not go in for full capital account convertibility –we are almost there now – but rather that we must move in the opposite direction of imposing greater restrictions and regulations on money being taken out of the country. We must review policies concerning exports and imports of goods and services, and impose greater restrictions on imports, curbing imports of luxury goods and services, and those related to such imports. We must increase public investments in energy, oil and natural gas exploration, fertilizer production and many areas of industrial and human resource infrastructure including education and health, using the enormous reserve funds available with the public sector enterprises. We must reverse the policies of privatization of industry, and the granting of huge bonanzas to the foreign and domestic corporate sector by way of tax concessions and cheap access to scarce natural resources. We must shift to a model of growth based on the needs and demands of the vast majority of working people and not the fancy tastes and preferences of a narrow elite which imitates the consumption patterns of the global rich.
What devaluation of the rupee does is to raise the cost of imports, and therefore, of all prices in the economy. It worsens inflation, which is already intolerably high on account of the government policies of high levels of indirect taxes and encouragement to traders and speculators. Devaluation hurts working people by bringing down their real incomes. It increases energy and fertiliser costs, harming the peasantry and agricultural labourers. It only benefits a handful of speculators. At the root of it all, devaluation means cheapening our labour in international markets: working harder, producing and selling more, but getting less!
The myth of bourgeois economics that exchange rates are determined by so-called economic fundamentals and the dogma that devaluation/depreciation of the currency will automatically increase foreign exchange earnings on account of exports should be categorically rejected. Public opinion must be mobilised against the ruinous neoliberal policies of the central and most state governments. The alternative set of policies based on basic land reforms, less inequality, greater direct taxation of the rich, increased public investments in health, education and infrastructure, greater democratic decentralization, and an economy of self-reliance with significant controls on foreign trade and capital flows must be popularised.