Lot of people don't understand the devastating effect of rupee depreciation on common man.
In mathematics they call is boundary condition analysis. Similar approach can be used to find the appropriate value of Rupee.
For a theoretical case : Lets Assume 1$ = Rs. 1000
Now practically all your goods would be exported to outside world. Export would be so profitable, common won't get any products (whether it is grains or gadgets).
1 Liter petrol would be Rs. 1000 1 gram gold would be Rs. 16,000
Oil would be so expensive, that even oil reserve we get in India would get exported.
What effectively happened is, we are giving all our minerals and work force of every Indian man to the betterment of people in USA. What do we get for that?? USA will print their own currency and give it to you.
In bottom line, It is plain old Slavery.
In boundary condition analysis. Lets look at the other side.
Lets assume $1 = Rs. 1
Now every thing in world 'll get imported. 1 Liter petrol will be less than Rs. 1. 1 gram gold would be Rs. 20. You can buy a good computer for Rs. 150. You can have a round trip for USA for less than Rs.1000.
You can buy a nice private jet for Rs. 50 lakhs.
You can't export any thing now.
*Unless* the product you export is really really needed by the importing country.
USA is importing like mad. They run huge deficit. Why do they do that??
Importing improves people's lives. Now exporters need to improve their efficiency to stay alive.
Inefficient exporters don't want to improve their efficiency. Currency depreciation is easy money for them.
What is the bottom line ?!
The country shouldn't rely just on exporting simple products like textiles, and minerals from your country. Software is a good example of quality export. It can with stand further rupee appreciation. Because importes don't have cheaper, quality alternatives.
RE:Thought Experiment ..
by Ravi Reddy on Apr 29, 2007 08:55 PM Permalink
Thanks for the details Senthil. If both Appreciation/Depreciation have their own drawbacks then which one is good for any country?
Unemployment in the country should dictate what the exchange rate should be.
Currently unemployment rate in Indian big cities (like Chennai) is like 1.5% This is unheard thing in history.
When there are lot of unemployed people, as a country you won't mind them working for foreigners. (not directly, but in producing simple things/services for exports.)
But with current low unemployment rate rupee appreciation is in nation's interest.
RE:Thought Experiment ..
by kumar googly on Apr 29, 2007 08:38 PM Permalink
good analysis.. software sure is a quality export. But we are NOT exporting software.
RE:Thought Experiment ..
by Bengal Tiger on Apr 29, 2007 11:37 PM Permalink
Very few people are aware of the benefits of appreciating currency, its good that you have given simple examples to enlighten people about the benefits of currency appreciation.
RE:Thought Experiment ..
by kishore kraleti on Apr 29, 2007 08:35 PM Permalink
Thanks. That was good example. I always wanted to understand import/export and foreign exchange funda, now its clear to me.
