Currency wars and economic hardship
Introduction:
On earlier occasions, value of rupee was declining but for last few days external value of it going down surprisingly at a precipitous rate. The Indian rupee has been on a downward spin and the conversion value of one dollar to a rupee is now 60. Indian rupee stumbles from 53 USD (US Dollar) to 60 USD on June 26. Indian Rupee (INR) reaches the lowest value to USD. Due to continuity in inflation and price rise buying power inherent in INR is declining. External value of INR in the foreign exchange market reaches to a record low. If INR has life, then it would have been crying in seeing the state of affairs of its exchange value. INR has highest fall compared to all the emerging economies of Asia. External value of INR decreases 6 percentages in the last two years. These are worrying trends. It is the current war. We are in the state of competitive devaluation. Other Asian countries are managing their economies and have been comparatively safe competitive environment than India.
The current account deficit makes INR most vulnerable and leaves a little space to survive on its own. Due to decrease of external and internal values of INR stock market indexes are going down. This affects internal business environments. Unstable politics and the slow pace of reforms making downward risks of INR are visible. It is a state of competitive devaluation and it is dangerous to the global economy. The government of India is expressing their dissatisfaction over devaluation of INR as against USD. Current prime minister of India was finance minister during 1991. The Indian rupee was devalued 24 percentages of INR as against value of USD in 1991. In 1966, government of India devalued price of INR to 36 percentages as against a value of USD. Devaluation has adverse consequences to the domestic economy. Historically this is not a preferred method. In 1948, exchange value of one USD to INR was 3.30. In later years, due to faulty economic policies and chief welfare measures internal and external value of rupees was continuously on a downward trend.
Currency devaluation:
Devaluation can lead to reduction of the standard of living of citizens and lack of purchasing power among them. Due to external and internal factors devaluation of its occurring. This can lead to severe political instability and price rise. Import will be less and the benefits from exports will go down. It will make internal debt of the country as well as personal loans for citizens costlier. It can lead to debt cage countries. It has very unfavorable impacts on the economy. What is worrying here, government of the day has not announced nothing substantial measures to save the economy of falling into dangerous currency war. We are living in a world where countries are competing against each other to achieve relatively lower exchange rate for their currency. America has achieved this and for this there are reports that more than one million new jobs are created there. The trading between nations is defined by governments. Currency controls are enforced by the Treasury Department of state. USD is a fully convertible currency. It is used in trading in the foreign exchange market (FOREX). INR is a partial convertible currency. North Korean Won and the Cuban Peso are example of blocked currency.
Foreign direct investment (FDI) is decreasing. One of the reasons for this is that they are facing a lot of difficulties while dealing with Indian banks. There are a lot of formalities before savings and when they want to withdraw money from their savings account then has to go through innumerable number of procedures. They deduct 30 percentages of tax of any interest paid in their money at Indian banks. Inflation has been on the rising tendency after announcement of welfare schemes. Many mega welfare schemes have been declared on the basis of tax payer’s money. No one is worried about the price rise and imperfect shape of the economy. Unstable political situation is bringing forward the situation of hopelessness and that is reflecting on the current market scenario. Market index is run through speculations and when there is the situation where business class sees rapid devaluation of rupees this creates panic among them. Exports value reduces, so as profits were as import value raises so as a decrease in profits. All these led to discouraging speculation inside market indexes. In the recent UN report to be believed, within 20 years India will be number one in population. Owing to volume of population growth the rise in need to sustain the sustenance of citizens is major cause of concern. High domestic demand is minimizing the growth of economy. In addition to it populist measures from governmental are adding the burden to ongoing crippled economy. We need to focus on productivity areas. Ours food imports need to be controlled. We should learn to produce more grains locally. For this, preservation of cultivated land is the necessity. Real estate on agricultural lands should not be promoted. The government of the day should not promote chief welfare schemes as it has adverse effects on the state of economy in the long run. Concentrate growth areas and mass production of crops.
Japaneese model of development:
We should follow the Japanese model of development. Government and the ministers should be penalized in case lower progress in their respective departments. This creates accountability. In India, there is authority without accountability in most departments. There should be strict vigilance on flow of public funds and laws should be framed who misuse in their own selfish interests. In this unfavorable circumstances government of the day needs to encourage exports by announcing free exports regimes. Government should protect traders. They should encourage NRIs to send remittances back to India with a loose hand. This will encourage FDI in India and also value of INR will be on higher side both externally and internally.
Here, in India, owing to reduction of FDI foreign exchange reserves are on the decline. This brings the point where there are fewer dollars in the hands of business persons and government treasury department. This makes the demand for dollars. For this INR is devaluating from its earlier positions of strength. Scheduled to not so favorable conditions for NRIs and FDI the deposits of dollars are reducing. Dollars reaches to India from foreign direct investment, NRIs deposits, shares and dividends, favorable economic environment, absence of red-tapes in decision making, absence of corruption in highest political stage, stable central government, peaceful environment, high savings bank interest, external industrial loans to foreign companies bring sufficient dollars to country. Non-resident Indians are used to deposit funds in India, when the savings deposit is higher than their living country. Now, in due course of time rate of deposit is continuously declining. They are not interested in keeping their funds inside Indian banks. Awaited to report on mass scale corrupt practices in the sphere of inner administrative class, this sends the wrong signal to foreign industries. They feel that sizable part of their profits would be sacrificed in order to clear their projects. Six months back with no reason for the price of gold related ornaments suddenly soars up. It touches the stage above 32,000 INR. It was an unbelievable hike. This was the warning sign. India should have been suspicious at that stage. In the mean time business processing outsourcing companies dealing with software management are facing huge losses. Some companies are changing their bosses in order to save their business ventures. INR should have undergone the process of quantitative easing. It will engulf vast filling up large scale domestic money supply, thus reducing the interest rate. People will not deposit a colossal sum of money as interest rates are not so favorable for them. They will like to engage with being as their inherent buying powers are on the rise. This will create plenty of scope for business people as demand for products will be on the higher side. Business grows and they have more money to meet imports and subsequently export products. These exchange mechanisms bring forward surplus trading of goods and services.
Intrinsic weakness of our economy:
A stronger USD brings forward extraordinary degree of lucrative overseas direct investment to the domestic arena if at all fiscal health is good in that country. External investors had pulled out $4.2 billion in the first half of June. It needs to be dealt seriously. Foreign Institutional Investors (FII) is investing short term deposits and pulling this money out from the country after a few months. The depreciating INR will have a higher impact on inflation and price rise in marital economy adding woes to citizens’ worries. This has huge impact on export competitiveness. Awaited to price rise, in order to avoid severe summer in north, many people are visiting foreign countries as they like to spend money on the dollar. This is giving them ease to expend and gives them huge benefits. These will reduce the advent of overseas tourists to India. Owing to absence of native tourists to places, the internal tourism sector will face the halt and this will influence many people in general in dealing with their livelihood. Till June 26, overseas institutional investors withdrew 9000 cores of INR and $27850 cores USD from FII stock exchange of India. This is a huge concern. Dollars deposits are reducing. India has to spend $150 billion dollar for importing crude oil from oil nations. India is spending $8.4 billion dollar for gold imports. This can be avoided in order to stop wastages of dollar spending. India can go for marital reproduction gold related ornaments to match customer demand. Domestic producers should raise their quality and standard in gold ornament production so that people should not waste in purchasing gold from abroad by spending dollars. India was spending $20 billion dollar or 100911 INR preceding year in importing milk, fruits, and vegetables, edible oils and toys. All these can be generated inside the domestic market in order to stop dollar wastages. This can in turn give a perfect scenario for the development of the internal market to rise for competitions from external competitors.
Mercantilism:
Another face of devaluation of the currency is to practice mercantilism. It is an indirect method of devaluation. It is related to attempts to boost exports by limiting imports. Domestic industries can be protected by mean of an easing of rules and introduction of favorable tax regimes. This will not encourage foreign institutional investors (FII) to invest in FDI inside country. This will boost internal business environment and that will make a stupendous field for domestic investors to invest and earn dollars. It is known as making devaluations through the introduction on intrinsic methods in economy. During the Napoleonic wars involved countries in the war situation were practicing mercantilism method of devaluation. Currency wars during great depression times in 1930s occurred owing to three premier financial state UK. US and France abandoned the gold value of rupees as a result intrinsic value of contemporary eroded further. Owing to large scale unemployment prevailing in these countries, the countries are trying to export unemployment to other neighboring countries. This practice of shifting poor and deprived is described as "beggar thy neighbor". In these torrid times, “Plaza accord” experiment can prove handy for India. In 1980s economic and financial break down of US occurred, it seriously thinks of creating devaluation of their currency. During those times, major business concern approaches the government and sends their helping hands to recover from a bad economic situation.
According to Breton Woods, devaluation of currency under a massive and successful economy should be done with proper care. Strauss-Kahn, then Managing Director of the IMF said that using currency as weapons. “is not a solution [and] it can even lead to a very grave situation. ” Many analysts feel that the global recession cannot be controlled. For this prominent developing as well as developed countries needs to unite on world economic forums. The world needs a permanent solution. United States and China are winning the current Wars. They are applying strict economic restriction methods. In this manner they are pushing the value of other international currencies such as Euro, Yen and INR.
Martin Woods, prominent economic analyst suggests the European Union to resist by restrictive monetary practices observed by both US and China. It would spark trade cards and other related ambiguity among world leaders. He advocated about targeted capital control against China to stop importing practices. In the time when intrinsic value of Yen and Euro is declining and the reverse is happening with China currency, the more it buys and imports, further devaluation of the Euro, yen and INR will occur. Brazilian President Dilemma Rouse who has coined the term “Currency War” suggested implementing floating currency measures and building of cooperation among major financial countries.
My suggestions:
Awaited to practice of unrestricted trade practices among US and China, world international monetary situation is slowly getting into erosion state. Owing to the advent of economic liberalization, it is impossible for India to control and manage its eroding economy. Foreign direct investors and foreign institutional are making us dance to their tunes. No one can restrict their competitive trade practices. They can leave any country without notice if they see decline in their profits. After them the concerned economy will be in tatters. They do not think anything about the country where they have practiced their business. They are not observing basic disciplinary human development indexes. It seems corporate social responsibility is completely absented in so called multinational companies. They are not thinking about countries which they are living and their economic and financial conditions. Still, they are advocating for a free economy. Owing to a sudden outflow of foreign exchanges through foreign direct investment from stock exchanges by foreign institutional investors is creating inflation, price rise and reduction of intrinsic value of the currency. America Federal Reserve was purchasing government bonds and relieving liquidity to market for quantitative easing. Now, it decides to stop quantitative easing. It reflects in augmenting intrinsic value of dollars. American multinational companies are returning to their native state in seeing the increasing of intrinsic value of dollars against other major currencies in the world. Multinational companies are removing money from stock markets from developing countries like India and Brazil to invest in their own economy. This is creating adverse impacts on developing nations such as India. We have been feeling the unpleasant side of liberalization. We had adopted free economy and unrestricted trade practices. Now, government of the day cannot prosecute these overseas institutional investors. Their hands are tied with international law and trade practices. Banks are buying dollars and speculations are adding fuel to the fire of an already pressurized economy of India. BRICS association is the amalgamation of developing countries such as Brazil, Russia, India, China and South Africa. These developed countries must unite and make a bond to protect their economies after stopping of quantitative easing from US. US has done to protect their economy from already vulnerable currency war among major financial nations. It is needed to revert back to post modernization and liberalization era of 1991. In such scenario, the basic foundation stone of the economy needs to be strengthened. Contemporary Indian mentality needs to go for a complete makeover in order to save the indigenous economy from biting the dust.
Like it on Facebook, Tweet it or share this article on other bookmarking websites.