Why is the Rupee declining?

The newspapers these days have been awash with news about the collapse of the Indian Rupee. From ₹44 to a USD, it has fallen to ₹60 today. And it is expected to keep falling; there's already talk about ₹70. Questions and confusion abound as to the reasons for its continuing fall.

There's been a lot of finger-pointing and blame apportioned over responsibility for this debacle. While the reason for the current sudden decline is the US economy's resurgence from recession creating demand for dollar assets, we need to take a long-term view here keeping the long-term trend of our currency in mind. The Rupee has been steadily depreciating since Independence. And for obvious reasons.

As this valuation chart on Wikipedia shows, from Rs.4 to a US Dollar in 1950, it had declined to Rs.18 to a Dollar in the 1980s. Then there was a massive forced depreciation due to the Balance of Payments crisis in 1991, and the Rupee fell to about 35 or so. Another decade, and it had fallen to Rs.44 in the 2000s. It is not surprising that it should fall again now to ₹60. And one can easily predict that it will fall further to the 70s, 80s and onward until the basic issue underlying a currency's value is resolved.

The fact of the matter is that India has continually run trade deficits since Independence. A trade deficit (or Current Account Deficit) is when our country buys more from abroad than it sells abroad. Why does this result in a trade deficit, you ask? It's quite simple.

Just as goods are priced in Indian Rupees in India, they're priced in foreign currencies abroad. So when you buy something from abroad and import it into India, you need to pay the foreign sellers in their own currency. For example, when India buys petrol from Saudi Arabia, it pays Saudi Arabia in US dollars. When Indian jewellers buy gold from abroad, they need to pay in US dollars. In order to pay in US dollars, India needs US dollars from somewhere. These are some of the ways the country acquires US dollars:

• By selling goods priced in US dollars in the world market. This is called exporting goods.
• It can borrow money from foreigners and pay them interest on their loan. This is done by issuing bonds and providing attractive interest rates.
• When Indian expats send their money home, they exchange this for Indian Rupees. They do this either through a foreign exchange dealer or through a government bank. This entity acquires US dollars or whichever currency was sold in exchange for rupees.
• When the Indian economy is growing healthily, foreign investors invest in India anticipating good returns. They bring in dollars, exchange them for rupees in order to invest within the country.

If India doesn't acquire sufficient US dollars through one of the means above, there ends up being a shortage of US dollars. This essentially means that there is unsatisfied demand for the US dollar. There are more buyers for the US dollar who are willing to pay more rupees for the currency. Since people are willing to pay more for the US dollar, you need more rupees to buy one US dollar.  Consequently, the US dollar rises in value and the rupee falls.

Given this understanding, it is quite easy to see how India can reverse the decline of the Rupee. There are two ways, both of which can be adopted:

• Buy less abroad. This would mean cutting down on imports. Petrol import can only be avoided by developing indigenous energy sources, be it nuclear power, solar energy, switching to electric cars and so on. Imported goods will need to lose their attractiveness and that can only happen if locally manufactured goods are of equally good quality and brand caché.
• Sell more abroad. For this to happen, India needs to manufacture goods that the rest of the world wants to buy. We need to develop local manufacturing capability for high-quality and high-margin goods that people abroad will pay for using their US dollars. As of now, there is nothing of real value that India exports other than basic foodgrains and raw materials which are low-margin goods. And IT skills, of course. We need to learn from our East Asian neighbours and start building a top-quality manufacturing industry. This will not only reverse the Rupee slide but will also provide jobs to all the unemployed people in the country.

The way out is fairly clear-cut. It is really up to people in India and our government to see the picture in its black-and-white simplicity and act accordingly.

Implications of a depreciating currency are bad all around. When a currency declines, it fuels inflation because all the things we need from abroad like petrol become more expensive in Rupee terms. Petrol is the underlying price basis for all goods within the economy and when it goes up in price, everything goes up in price. In contrast, when a currency rises in value, things we buy abroad become cheaper and this helps keep prices low. What cannot be manufactured within the country can be bought abroad cheaply thus improving quality as well as supply of all goods.

India and its neighbours

I'm glad articles like this one (Pakistan Tribune, April 1, 2012) are being written in the Pak press. I do believe as I've mentioned earlier that if we were to develop economic ties, borders would become soft like in Europe and these disputes a thing of the past. Not just between India Pakistan but far beyond. Goods and people being transported freely from Teheran to Bangkok on freeways and railways. Everyone prospering as a result of the peace and economic buzz.

One of the Pakistanis (usmanx) commented on this news article that India had mistreated all its neighbours since Independence, and so it was good for Pakistan to remain hostile to keep India in check. Here's his post:

How are India’s relations with Sri Lanka who despise her for her interference. How about Nepal who have no-visa policy but 400 sq. km have been encroached by her more powerful southern neighbor. How about Bangladesh, although liberated by India (really bengali freedom-fighters) terminated its friendship treaty with India and constantly feels over-powered. How about China – who taught the Indians a lesson for the provocative forward policy (indians belived themselves to be the inheritors of its northern boundary imagined by her former masters (the british). How about Maldives where India sponsored a coup. Imagine the regional countries condition if Pakistan was not there to counter India’s hegemony.

I would like to respond to usmanx's post, specifically his references to India's other neighbours, as his appears to be a common view among his countrymen:

China: China wasn't even on the scene in the Ladakh border area until they occupied and annexed Tibet in the 50s. The British may have been pushing into the north and the border India inherited a newer border. But you could make that case for KP as well, not to mention Balochistan. KP is a vestige of the British foray into Afghanistan. It is the main reason Afghanistan did not recognize Pak for the longest time. And is still a dispute from their perspective. Will Pakistanis support Pakistan giving up this area as well? Baluchistan was a free country until very recently. And Pakistan just inherited a new British acquisition. By his argument, it should be let go as well; it's not like they haven't been struggling for independence for decades.

Nepal: I've never heard of any encroachment or border dispute here. There is visa-free movement and lots of Nepalis live and work in India without any problems.

Bhutan: they too much appreciate that India is there to protect them from Chinese takeover if the need arises. Never has any Indian army encroached into their land. They maintain their distinct culture and independent monarchy as they prefer.

Burma: The US and India are cooperating to drive the military junta to implement democratic reforms and change is already evident.

Bangladesh: as political parties change in BD, the relations have ups and downs depending on their issues of the day.

Sri Lanka: FYI India intervened in SL on the side of the govt to stop the terrorism. This is why Rajiv Gandhi was assassinated by the LTTE. Hardly would SL be wary of us. AFAIK, we enjoy good relations as proven by the UN vote just last week.

Meanwhile, Pakistan isn't exactly the favorite among its neighbors either. Afghans hate you for having used and abused their country since 1979 and unleashing the Taliban on them. Iran is wary and dislikes Pakistan for its treatment of Shias. Chinese look at it as a good means of making money and getting linked to the Gulf but in private, snicker about the fanaticism and the fantasies Pakistanis live in (read all about it if one can google). And I don't even need to mention India that has suffered constant terrorist attacks and aggression from Pakistan.

Ultimately, I believe all countries will always have some issues with their neighbors. China has issues, Japan does, the US does. It's human nature. Singling out India as the bad guy is more indicative of Pakistanis' distorted view than any reflection of reality.

The fact of the matter is that today India has no interest in these ridiculous squabbles with Pakistan. Our primary interest is in prosperity and security for our people. We have always been open to a cooperative relationship with Pakistan. It is really for Pakistan to work out its issues, stop living in a made-up world and make up its mind vis-a-vis India.

Reserve Bank of India to issue ₹10 (10-rupee) polymer notes

While Googling around for news on the Rupee, I found some interesting articles about how the Reserve Bank of India (RBI) has been trying to improve the production and distribution of currency. I was surprised to learn that a note only stays in circulation in India for 6 months before it is so dirty, torn or crumbling that it gets turned in to a bank for a replacement with a fresh one. We've all noticed that in the past few years, the number of such mutilated dirty notes that we handle has gone down drastically — none of the notes in my wallet strikingly enough are in so much as a creased state which was unheard of a few years ago. I used to put this down to luck, but was enlightened by this article about the RBI's Clean Note drive that puts this down to active effort by the RBI than random chance. It also talks about how the coin situation has been drastically improved. In the past, coins used to be Holy Grail material. People would hoard them and would be loathe to part with them. Transactions would end up abandoned because neither party was willing to part with their much-prized 50p, ₹1, or ₹2 coins. While the tendency to hold suspect anyone who hands out a whole amount note expecting coin change in return, as having nefarious designs to finnagle coins out of you is still there due to the history of our experience with the dearth of coins in circulation, it is disappearing due to the abundance of these coins these days, again due to the drive mentioned above which has dramatically improved production capacity. As part of this drive, the lifetime of a banknote has also been extended as banks have been prohibited from stapling notes which they used to do with abandon earlier, leading to mutilated notes being put into circulation right at the bank.
Also interesting and the reason for this post, is that the RBI is expected to issue 100 crore ₹10 (Rs.10) polymer or plastic banknotes by the end of the year (another article about this). These notes have loads of top-of-the-line security features such as the see-through plastic feature seen on Australian notes which is nearly impossible to counterfeit, have much higher durability (RBI estimates a polymer note to last in the Indian market for 5 years as opposed to the 6 months a paper note does), can be washed and are very difficult to tear or otherwise mutilate. It is expected to save the Exchequer ₹580 cr (Rs. 580 cr) per year in production and distribution costs due to the frequent need to replace paper notes. I understand that the polymer technology would need to be licensed from the Reserve Bank of Australia which was the first central bank to introduce and fully convert to polymer notes in order to beat counterfeiters. While there are definitely problems seen in countries like Thailand and Mexico with the print on polymer notes fading in a couple of years, sticky notes being difficult to handle and so on, I'm still looking forward to the ₹10 issue - it's great technology, clean washable notes in my wallet will be a plus, I'm curious to see the design for these new notes, and I wonder how Indians will react to them.

Secularism rules!

I am so glad that the constituent assembly that wrote the Indian constitution gave us a secular republic. Yes, they did many things wrong - they should have called for a complete reconstruction of the civil services (the police for instance), should have written a uniform civil law and should have called for better structuring of affirmative action policies — but by clearly separating religion from state, they gave India, a country of myriad different religious viewpoints and identities, a stable polity to build on. Debates like this one where Pakistanis endlessly and fascinatingly debate the role of Islam in the country, just bring out in relief (pun intended) just how much Indians have benefited from a secular polity. And I say this, as a practicing Hindu.

Rupee symbol (₹) now part of Unicode

The newly minted Indian Rupee symbol (₹) is now part of Unicode and has been assigned codepoint U+20B9 in the Currency Symbol block.While we await the OS manufacturers to ship out updates to add this symbol to their system fonts and also make it available for typing in when one installs Indian locales - the Indian government has apparently mandated ^⌥R (Ctrl-Alt-R) as the combination to be used to input the symbol - individual font designers have already come out with easily usable fonts for the symbol at the correct codepoint. The first one to be published is the Rupakara (रूपकारः) font designed by Mr. Michael Everson from Ireland and made available for free via an open licence. You can download it from these locations:

http://www.evertype.com/fonts/rupakara/

http://blog.foradian.com/rupakara-first-font-with-indian-rupee-symbol

To use it on a Macintosh, download the 4 TTF files, select them all and open them in FontBook, and click on "Install Font" to install the font on the system. After you do this, you should be able to see the symbol correctly on any documents or webpages that encode it at the Unicode codepoint U+20B9. As a test, the following sentences should make sense to you and display the symbol correctly:

• The evidence of massive runaway inflation is all around us: In Mumbai these days, you can buy a litre of dairy farm milk for ₹36 and a kilo of dahi (Indian yogurt) for ₹60 which is almost double the price a few years ago! Onions have gone from ₹7 a kilo in 2008 to ₹36 today!!
• आजकल मुंबई में एक लीटर दूध का भाव ₹३६ है और एक किलो दही का ₹६०, जो कुछ ही सालों के मुक़ाबले दुगना है!
• ₹36/litre = ~$3.15/gallon @ $1 = ₹43 as of today.

While you can view the symbol, in order to type it, you need to jump through a few more hoops, until Apple releases a keyboard shortcut for the Rupee (ideally, it should be⌥ (Option) followed by some key in keeping with the Mac custom). In the meantime, you have two options:

• Use the Unicode Hex Input utility: This allows you to type in Option followed by the codepoint (20B9 in our case) to have the symbol encoded at that codepoint to appear. It's available in the Input Source viewer once you have enabled it through  > System Preferences > Language and Text > Input Sources.
• Use the Character Viewer utility to pick out the Rupee symbol and add it to Favorites. Whenever you need to insert the symbol, pick it from the Favorites list and click Insert. You can also use the Clipboard for convenience.

If you have any questions about any of this, feel free to send me a comment. It's quite simple and straightforward, so Enjoy!

Two Muslim views on Partition

From my interaction with Muslims from all over the subcontinent, there are two primary viewpoints that I can distinguish when it comes to Partition, that watershed event in the subcontinent's history in the last century.

The first one sees Partition as a painful but glorious event, whereby a homeland was created for Muslims where Islamic culture of Mughal and other origins could flourish, where Muslims could keep their customs and traditions alive, free from being submerged and assimilated into the multitudinous multi-religious but Hindu-majority mainstream that was India. This view also holds that if Partition had not happened, Muslims would have been constantly persecuted in India by the majority Hindus. And in support, people holding this viewpoint point to the regular riots and tension between the two communities in India, and point to how the creation of Pakistan and Bangladesh keeps the Muslims in these countries safe from such trouble.

The other view is that Partition was a colossal mistake. Instead of a united Muslim polity in the subcontinent, it divided the Muslims across three states that are pitted against each other. This view holds that this was a grand strategy of the enemies of Islam to keep the religion weak in India and prevent it from ever taking control of the subcontinent again. The event also forever restricted Muslim areas to be those of the new states, and condemned the Muslims who chose to stay behind to a minority existence. They point to numbers where instead of a 500-million-strong (500 million = 50 crores) united Muslim population that would have formed 1/3 the population of a united India and would have had the shared power with the Hindus to decide Indian destiny, what you have today are 3 divided populations, spending billions of dollars in fighting their neighboring states. Instead of a united shining India that would have been the envy of the world, given its rich cultural heritage, its land rich with natural gifts, with enough arable land and food aplenty to feed everyone, Partition left a legacy of squander and death and sadness. A subcontinent this rich, with people so sweet, civilized and cultured to each other in normal times, would have made unbounded progress to quickly take its place among the leaders of the world. With a diverse population, with strong and friendly links with the Islamic world, while being fully confident and proud of its millenia-old heritage embodied in the Hindu, Buddhist and other populations, the country would have been a magical place, to rival the United States in terms of diversity and equality and justice. And Partition, in this view, destroyed all that. That the India that remains aims to achieve just such a vision is small comfort to people who hold this view, typically progressive urban Muslims in India.

Both views to me, are fascinating. Has Pakistan achieved the dream of a just, equitable, loving Islamic land? I hope Pakistanis can comment on this. Would India united have achieved the vision laid out by the latter view? It's something to wonder about.