Government's wrong policies behind rupee fall

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By: Himanshu Jain Back in 1957, Ayn Rand, in her magnum opus Atlas Shrugged, showed the world as to what happens when the looting runs dry. When the government starts to trample over the productive society and redistribute wealth, it can certainly make some quick electoral gains but soon the nation is driven out of its vitality and resources; very soon, there is nothing left for the government to redistribute. A sharp depreciation in the currency, falling growth and rising inflation are just some signals towards such a scenario, and to blame it like every other piece of internal economic travesty on some distant western country is an attempt to run away from reality. The Indian rupee has been among the three worst-performing currencies vis-a-vis the dollar in the past one year. That is, indeed, quite an achievement considering that all our south Asian neighbours have done better than us. The recent moves by the Reserve Bank of India (RBI), including asking exporters to convert 50% of their dollar holdings into the rupee, would do little in arresting this slide till the fundamental reason behind this fall is not addressed. In fact, this move by the RBI reminds us of an adage, desperate times call for desperate measures, and the fear is that more such capital intrusions can come into play in the future should this slide in the rupee continue. While there can be several factors that can influence the short-to-medium term movement of a currency, on a secular basis, the price of a currency is pretty much dependent on the forces of supply and demand. So, in essence, the increase in the amount of credit net of the actual growth - of real goods and services is what determines the relative value of the currencies in the end. A brief glance at net credit growth - credit growth net of GDP growth - of India and US shows that the net credit growth in India has been almost consistently higher (by a wide margin) than that of US except for a five-year interlude during 2003-07. This fact, as one can see, clearly superimposes itself on the direction of the Indian rupee that depreciates remarkably over this period except for that five-year hiatus. It is, indeed, conspicuous to see the consistent low GDP/credit ratio of India vis-a-vis the US. While the lower productivity of Indian labour can be cited as one of the reasons for this phenomenon, however, this argument can be easily put into question by the outperformance shown by the Indian economy during its 2003-07 heydays. So, clearly, if the lower labour productivity argument does not hold much water, then what could be the reason for this abysmally-low GDP/credit ratio for Indian economy and consequently the state of our currency?