Pseudo economists are taking the public for a rise by stoking the patriotic feelings of Indians by harping on the strong rupee. But do they really know the consequences of currency appreciation on its economy? The phenomenon called %u201CDutch disease%u2019 mentioned by the RBI deputy governor in his recent address throws light on the consequences.
%u201DDutch disease%u201D is An economic condition that, in its broadest sense, refers to negative consequences arising from large increases to a country's income. Dutch disease is primarily associated with a natural resource discovery, but it can result from any large increase in foreign currency, including FII investments, foreign direct investment, foreign aid or a substantial increase in natural resource prices.
This condition arises when foreign currency inflows cause an increase in the affected country's currency. This has two main effects for the country with Dutch disease:
1. A decrease in the price competitiveness, and thus the exports, of its manufactured goods 2. An increase in imports
In the long run, both these factors can contribute to manufacturing jobs being moved to lower-cost countries. In the 1970s, the same economic condition occurred in Great Britain, when the price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer. The pound soared in value,
RE:Rising Re.: India must stop speculative FII flows & currency carry trades
by VikuJ Indiacraft on Jun 19, 2007 05:40 PM Permalink
With the Rupee strengthening against the US$, the country has more to loose than gain. Today Economic Times anounces that Wipro and TCS have started their reversal trend in hiring US employees to cater to their customer needs in US. The primary purpose is the dollar - ruppee exchange rate - nothing else. India IT and manufacturing growth (export) can be seriously halted and then a reversal downward trend can be witnessed.
RE:Rising Re.: India must stop speculative FII flows & currency carry trades
by Manohar on Jun 19, 2007 07:54 PM Permalink
VikuJ, i guess more of a reason for wipro and TCS in doing so is to hedge against the unclear immigration policies of the USA, than the exchange rates, though the companies do not say that.
RE:Rising Re.: India must stop speculative FII flows & currency carry trades
by Hopes Consultancy on Jun 19, 2007 06:29 PM Permalink
That's great sign. Reduction in exports will fuel local demand or supply. As companies taget more on local market, Indian market grows. Consumption growth in turn will boost demand for high end services like IT.
Remember USA did not grow by exports, it grew only by huge local market.
RE:Rising Re.: India must stop speculative FII flows & currency carry trades
by sam on Jun 19, 2007 05:38 PM Permalink
In the long run, both these factors can contribute to manufacturing jobs being moved to lower-cost countries. In the 1970s, the same economic condition occurred in Great Britain, when the price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer. The pound soared in value, but the country fell into recession when British workers demanded higher wages and exports became uncompetitive.
Effects of Dutch Disease If the FII inflows begin to reverse, manufacturing industries do not return as quickly or as easily as they closed. Since there has been less growth in the economy relative to other countries, its comparative advantage in tradable goods will have shrunk, thus leading firms not to invest in the manufacturing sector Also, volatility in the real exchange rate may prevent more investment from firms, since firms will not invest if they are not sure what the future economic conditions will be. There are also many other harmful effects often associated with Dutch disease, such as corruption and protectionist policies for affected lagging sector industries. Hence FII inflows in the speculative sectors like stock markets leads to currency becoming stronger & exports uncompetitive. This will lead to closure of such manufacturing industries & downturn in the economy. Hence stopping of speculative FII flows into the stock mar
Some how I never understood, how can inflation rise so steeply when the rupee is also increasing fast in last 3-4 months. In other word if you look at it, we can say inflation is far more then what we understood because we should add rupee apprecetion to it.
Another things is, If rupee increases fast and keep on doing so, dose this mean that FII will not be intrested to take there money out of indian stock market because they get double returns. Again fresh buy/sell from FII will have less impact. If rupee is going to increase furhter then non-IT stocks should see steep price rise
RE:inflation and rupee value
by Ajay on Jun 20, 2007 07:09 AM Permalink
In a perfect economy, and all economic theroy is about perfect markets, we all want to maximise our retrn.
So when interest rates go up for a particular currency people would exchange their currency to the hight interest paying currency so they can earn higher retrn - interest.
So when rates go up, people save more - put money in fixed deposits, reduce spending - thus reduce money supply in the market. everyone wnats to convert to this high yield - one which pays more interest currency and thus it becomes more valuable.
Rupee is not exactly a fully convertible currency but people like me are to blame being a PIO i am allowed to create a FCNR acount and save money here. It pays me more to save in India, even if i do not convert it to Re. USD Interest rate in India is 5% while it is only 4.25% in US.
So there are others who sensed a boom in property market and sent money to india to buy property. hey converted USD to Re. This increated money supply as more Re were added to market. Now, Increated monet supply invariably causes inflation, which we saw over past few month and to tame this central bank can either increase CRR - cash reserve ratio - money banks need to keep with central bank - RBI as security or the overnight lending rate is increased. Which increates your interest rates. Depending on market mood this reaction can be exggerated.
Appreciation of Rupee means disaster for Indian exports when India is having very serious deficits in both balance of trade and payments. Only the remittances of the NRI is helping India. The situation is not very different from that during the years under Rajib Gandhi: very high growth and then collapse.
RE:Be Afraid
by oommen john on Jun 19, 2007 06:31 PM Permalink
Hah Hah. Yes rajib who! Well, may he is the brother of Rajiv Gandh. living somewhere in a village in Amethi! And do we have a future Prime Minister!
RE:Be Afraid
by Hopes Consultancy on Jun 19, 2007 06:31 PM Permalink
Its wrong perception. But yes if govt does not work on fuelling local demand unlike Rajiv Gandhi we may collapse even with high ruppee rate. Only way to grow is CREATE HUGE LOCAL DEMAND.
Another important factor evaluating a country's development is the spread of wealth. One statistic that measures it, is the Gini index. Progress is required here too.
He says " For the past two months period commencing mid-March and ending mid-May 2007, it is common knowledge that the Rupee has appreciated by approximately 10% against the US dollar. However, when we benchmark the Rupee with a composite 36-currency index, it has not shown any significant appreciation as many currencies many of which are India's competitors on the global stage"
May we know what currencies you took for comparison? Because, the observation for the past 3 months show that Rupee has appreciated by upto 10% against all currencies. Let's see a few examples:
1 Euro was valued at Rs. 58.10 in Mar 2007 1 Euro is now valued at Rs. 54.30
1 Singaporean Dollar was valued at Rs. 29.00 in Mar 2007 1 Singaporean Dollar is now valued at Rs. 26.00
1 Malaysian Ringitt was valued at Rs. 12.70 in Mar 2007 1 Malaysian Ringitt is now valued at Rs. 11.50.
Please do not mislead the readers with your inaccurate stats... Rupee is marching ahead !!!!
That was not what Venkatesh intended to tell. What he meant was the japanese yen and other currencies are appreciating against the dollar and hence the competitive nature remains constant.
Except for damage control as short term exercise, India need not do anything as India's capacity is very low with its share in world trade at merely less than 1% in comity of about 180 countries out of which 50 are just dot sized. So India can hardly do anything. The foolish manner in which interest rates were rapidly decreased and money got transfered to rich people and corporates and banks and huge escalation in commodity and goods prices and property prices at the moment show Indian planners don't have any control or capability. Lesser they act ,the better for country and society. Economic and market forces will slowly restore eqquilibrium in the exchange rate.India should generate demand for rupees rather than trying to curtail supply of dollars.Got it? We always try to modify others and government thinks they have prime burden on their heads to supervise business and industry and regulate it by some means.if nothing is left they start taxing everything.That is what PC is doing and it will be another disaster after Man Mohan's big failure.Both should leave offices. I even doubt the growth rate figures churned out by indian government which are as (un)realistic as Consumer prices shown by media and there appears to be some statistical error or jugglery that needs deeper insight by real experts.
It does not visualise how will the change in exports and imports takes place. The appreciation of rupee may hit exports provided the consumption around the globe is stagnant which will not as the consumption also increases as many societies are becoming more materialistic. This logic may not work since we donot know how will our agri and industrial products are related in world as other countries are also competitors
RE:dollar
by Ajay on Jun 20, 2007 07:17 AM Permalink
Well even of the consumption around the globe is staganent, production happens in the most cost effective place. With the barriers removed production moves to most cost effective place - please not most cost effective might not be the cheapest place, it might be but not necessarily.
We have a huge population and franly i do not have much stats about Indian Agri business. If a tonne of wheat grown in Australia costs me less than Tonne of wheat grown in Punjab as a trader i will buy Aussie wheat.
RE:Now what
by KJ on Jun 19, 2007 05:06 PM Permalink
Without any bias to the article or to the policy of the rupee to appreciate - Congress has ruined the country, and continues to do so!
If you see the history of other countries such as South Africa who had got Independance much later than India - Infrastructure (Roads, Water, Electricity), Beuraucracy, Education & Industry is far ahead of what India is. Come to think of it, we needed a visionary government/individual like Mandela - But were screwed by the Congress. Yes, our law/order is better than South Africa, but come to think of it, everything else is a screw ball!
WRT PC, he is an anti-northindian & would do anything to tax the "babu's".
RE:Now what
by Pradeep Kumar on Jun 19, 2007 05:14 PM Permalink
No - no BJP is really good they disinvest everything and bring ppl to streets..they work on short term benefits.
RE:Now what
by sudip sinha on Jun 19, 2007 05:24 PM Permalink
Don't put your political view here....May be you can give this type of comments to some other place....It's not an ideal one!!
RE:Now what
by Ramesh Kumar on Jun 19, 2007 05:57 PM Permalink
Well, Pradeep. People have divergent views and that is perfectly OK in democracy. With all due respect to PC (he certainly has to manage an economy which has sort of "gone out of hands" due to uneven/non-uniform and near-explosive growth) and MS (not easy to be a puppet PM either, especially with the kind of reputation he has reg. his gentleman nature and for steadying the economy in the past), it's an open secret that what Indian economy today has nothing to do with the CURRENT tenure of PC and MS. In fact the current government is exploiting the inherent growth in the economy by incessantly taxing the "guinea pigs" that is the salaried class. Leaving the BJP apart, Congress is well known for their corrupt nature (in all meanings of the term). Just look at the presidential election, the current "hot news". Congress has ALWAYS ensured the presence of "a political" person as president (and state governors) while the constitution clearly specifies "APOLITICAL" persons. You might have your own justifications for hating BJP, but that should not be your justification for LOVING congress for achievements that they do not own.
RE:Now what
by Santhosh M.P on Jun 19, 2007 05:04 PM Permalink
MR.Pradeep kumar do u think our PM or PC is responsible for this growth ... India can and will grow with out these bullshit politicians doing nothing... the growth is slow because politicians are responsible for it .. they r doing nothing other than this ... so dont praise them for nothing .....
