The currency appreciation is mainly as a result of capital inflow from FIIs, FDIs and ECBs. To counter that RBI was mopping money and injecting liquidity. But, this causes inflation. The best way to fight currency appreciation is to do the reverse of FDIs and FIIs - encourage more Indian companies to buy overseas assets and companies.
So, the big problem now is how to deal with billions of dollars that come every week, while already holding a $200b worth reserve. Why not encourage more companies like Tata that bought Corus thereby causing an outflow of dollars? India should encourage its PSUs to buy more oil fields, mines and other assets abroad along with guided value purchases that will bring India better practices and more potential for intra-company exports. This will bring as much benefit as incoming-FDI, while keeping rupee lower.
For this to happen, we need to evolve a national policy and bring low-interest dollar loans for the companies to make valuable purchases abroad that will benefit everybody.
Blah blah blah blah. Easy to observe and comment isnt it? Predictions, forecasts, analysis. Such a thing is happening. ... its good.. its bad... it should have been done this or that way.... blah blah blah blah
Great economists seem to think you can always play around artificial measures like increase/decrease interest rates, allow flexibilty in currency trading etc to control economy. These things worked in the past in strictly controlled economy like the one in USA.
But as economic globalization proposed and propheted by USA is now making its way totally out of control. The major issue now with this currency problem is Americas trade deficit.
China, america's main trade partner is now exporting to USA 100s of billions more than China import from USA. This and other trade deficit now accounts for 67% of USAs GDP. Now the USA manufacturers are facing tough competition with Chinese manufacturers in terms of prices of commodities.
Now USA recognizes one major problem of its own deed. They outsourced manufacturing to China for the profits of big corporates. China grew boundless. Now the remaining manufacturers in USA are facing tough time competing with China.
To counter this self incurred problem, USA is forcing China to raise the value of Chinese currency. But China will not yield because even 3-4% rise in Chinese currency value will make millions of Chinese people jobless. Export business will collapse. It may be a sure way of economic disaster. This is because the exporters in China are mostly manufacture based and are running on a very very thin margin. In addition to this dilemma, USA retail industry is not in favour for Chinese currency appreciation. Walmart, target, K-mart and other retail giants are profitable becuase they extract too much of chinese manufacturers. If Chinese currency appreciates even 4-5%, these companies will face billions in loss. The value of Chinese currency is a double edged sword for US economy. If the value appreciates as US now wants, US people will end up paying high price for even day today stuff. This will push the so called already shrinking middle class to lower class. But if the value does not appreciate, the US manufacturers will loose marketing edge in domestic and international market over Chinese products. Mere economic measures can control such devastating situations. now if USA tries to bring the chinese currency value high which means instability in dollar value against many other currencies unless USA manages situations very carefully. If the international traders loose faith in dollar, it could be catastrophical for USA.
It is a dilemma for Chinese and USA alike. I would say luckily India is not affected to greater extend of economic disaster as india's foreign revenue is more from service sector. The margins are high. Currency value variations shall not affect our economy that much. It is good that way. India should do more in service sector than in manufacturing sector. Economic stability is more desirable for common people than all these artificial ways to keep economy somewhat stable. That is bound to burst one point of time since in this age of globalization, controlling economy is very risky.
RE:Risky part of Globalization
by on May 23, 2007 06:58 AM Permalink
Before writing such a long essay, it's a good idea to get the basic information right.
Chinese currency Yuan appreciated (8.2-7.6)/8.2=7.3% in the last two years, yet export business in China didn't collapse as you described, or wished, actually, export increased at a faster pace.
RE:Risky part of Globalization
by Biju Narayanan on May 24, 2007 12:14 AM Permalink
Wishing nothing shall happen to china's export is a good thing. But please do not turn your faces away from reality. Involve in some trade activity to know the reality. I have trades with China and I know how they are operating. Plus read more on the recent topics discussed in China-USA summit happening now. Also see why china is adament on not increasing the value of Yuan even with tremendous pressure from USA. Most pro-globalization articles usually hide several facts. If anyone thinks beyond these articles, it is easy to see where global economy is heading to.
RE:Risky part of Globalization
by Anthony on May 23, 2007 02:45 AM Permalink
Absolutely Right - the coefficient of the linear is just a position by the haemoglobin of the atmospheric pressure in the country
North west of india is utilised for low cost labour and midwest and south for high intensity service sector.Unfortunately the real labout would be around central and north central east.And for labout to be competitive they should be utlised.Companies should invest in gorakhpur aur bihar to attract low cost labour.They should make 3 year degrees 4 years to make more students come into the net of employable students,unlike just engineering graduate now.This stupid govt is concentrating on caste and crap instead of building another golder corridor.We have unrest in south (Hyd).punjab and delhi now,cpi and naxals in the east.Time for UPA to go home and talk about aam aadmi and socialism
RE:The problem is distribution
by Anthony on May 23, 2007 02:46 AM Permalink
I totally agree sir. You see the coefficient of the linear is just a position by the haemoglobin of the atmospheric pressure in the country.
RE:This topic is for sophisticated readers
by Anthony on May 23, 2007 02:44 AM Permalink
Anurag, you see the coefficient of the linear is just a position by the haemoglobin of the atmospheric pressure in the country.
Articles like this, written by Senior Fellow and Senior Research Professor go over the top of common people. Using all his experience, he ought to have been able to make the article simple and easy to understand. No doubt, the subject and the solutions given, if any, are stuff everyone is dying to know. But can we understand the presentation and language?
Could the author/ someone advise where the rupee is heading to? Is it going to appreciate more/ stay stagnant/ depreciate in near and distant future? Since RBI is not controlling it anymore, who controls it now and who considers the so many negative affects of an appreciating rupee? Cheers Kunal
