Daily Times

India has never had a freely convertible currency since independence. We therefore have no way of knowing its true value in the international market. The currency’s day to day value is loosely determined by demand supply in the local currency markets open only to domestic players and a few authorised foreign banks within a band set by Reserve Bank of India (RBI). The average level of the Indian Rupee (INR) was 44 in 2007 before the world’s financial crisis began. The INR has hovered between 38 and 46 to the dollar since 2007. Recently, it shot up to 52, raising a hue and cry in the markets. Indian inflation has raged between eight percent and 15 percent since 2007, depending on which measure one uses while most of its trading partners have been near deflation. On an average, the inflation differential between India and its trading partners can be assumed at roughly 10 percent per annum. Over a four-year period, if 44 were a fair value for the INR in 2007, then it should be close to 65 today. Going by inflation differentials, even at 52, the INR is overvalued by 25 percent. Why is it that India’s middle class prefers a ‘strong’ rupee even if it is overvalued?

In India’s socialistic era, all foreign exchange earned by Indians, exporters or others, was preemptively purchased by the state at an administered price. Importers not only needed an import licence to import anything from abroad, but also had to buy the foreign exchange from RBI, again at an administered price. Since the administered price of the dollar was way off the INR’s true value, importers, exporters and domestic producers and consumers are impacted differently by this mechanism. The state used the administered price mechanism to promote the domestic industry as the best way to modernise the economy. Since the industry required a whole host of imports, in terms of plant and equipment, machinery, technical knowhow and raw materials, it was the biggest single buyer of dollars in the market. Hence, the state was obliged to keep the rupee artificially over valued in order to provide inputs to industry at the lowest price possible. This socialistic concept has persisted in our collective mindset ever since Nehru drilled it into the national psyche. We have still not fully recognised the baneful impact of such over-valuation of the INR.

India’s export basket at the time of independence was largely agricultural commodities like cotton, jute, sugar and the like. Nehru’s love for industrialisation meant that these sectors were underpaid for the dollars earned by them and the benefit passed on to industry. In other words, Nehru’s policy taxed the exporters of agricultural commodities to give subsidy to industry. Nehru’s idea was that industry would create jobs thus shifting labour out of poverty in the agricultural sector to better paid jobs in industry. As with most well meaning state intervention in an economy, this woolly-headed idea worked perversely. In practice, the policy impoverished the farmers who actually produced something worthwhile and reduced wages to poor agricultural labour. On the other hand, it added to the unearned profits of industrialists, while the jobs created in industry largely went to the lower middle class and not the poor agricultural labour. Net-net, a policy designed to help the poor, actually increased poverty. Nevertheless, the argument for industry is so deeply entrenched in our discourse that to argue otherwise is deemed unpatriotic.

The first order of business in the reform package of the 1990s was a haircut devaluation of 20 percent that slashed away a substantial portion of the hidden subsidy that industry had enjoyed. It also raised prices for the imported goods consumed by middle class consumers who craved quality goods from abroad. However, this price increase was a one-time affair. If, for instance, the price of cars went up, the number of factories to produce those cars went up too. So did the middle class wages and in time the affordability of cars and car ownership increased instead of decreasing. Hence, the one-time cost realignment is usually a temporary dislocation that should not worry either government or consumers. Industry, over time, learned to live with less subsidy and those that were grossly inefficient, went out of business. Twenty years after the first currency reform, there will hardly be any people left who will argue for currency controls of the socialistic era. However, our currency is not yet free and gross over valuation still persists.

One of the biggest success stories of our liberalisation has been the growth of our software services industry. It is the employment created by the software industry, and not just its profitability, that has brought prosperity to millions and helps drive consumer demand in diverse industries such as automobiles or housing. Software services have been the true driver of incremental growth that has propelled the GDP growth rate from four to five percent to eight to nine percent. What lies at the heart of our success in software services? Simply put, it is labour arbitrage. An average programmer in the US or EU costs 10 to 20 times of his/her equivalent in India. Technology makes it possible to replace highly paid US labour at a small fraction of the cost in India. And that labour saving is shared in reduced costs for businesses outsourcing work to India and profits for the firms providing such services from India. It is that simple. In fact, software services grew out of what we now call body shopping. The sector is one way to convert our natural advantage in low labour costs into a profitable export business. That is the key take away from the software services story after first generation currency reforms in the 90s.

If low cost labour arbitrage is our key strength, can we not use the same model to build profitable business in other sectors? People are trying that in areas such as legal services, design and engineering, accountancy, etc. However, our biggest pool of labour, the unskilled and semi-skilled labour in rural areas and small towns is still not the focus of development. Agricultural production for exports represents our single biggest opportunity to use this pool of poor people not only to earn profits but also lift them out of poverty without wasteful subsidies. So why do we not produce agricultural products like, corn, vegetables, sugar, wheat, rice etc. in greater amounts for the export markets that suck in this pool of labour as much as software exports sucked in our unemployed graduates? What prevents us from arbitraging our unskilled and semi-skilled labour profitably?

The US and EU have long had import quotas that shut out agricultural exports from countries like India even though Indian products would have been much cheaper. That constraint has now vanished with China emerging as the largest importer of agricultural products sending commodity prices to all time highs. So market access is no longer the constraint it was. What we need is reforms that help organise production for export by the private sector. That means allowing the private sector to lease land from farmers, breaking up the cartels in Agricultural Produce Marketing Committees, allowing the corporate sector in multi-brand retailing, warehousing etc. It also means creating infrastructure at our ports for export. All these can be done with some concerted effort at reforms. The intriguing question is if the steep currency devaluation now underway, and the reforms in retailing lined up, are part of a package designed to promote agricultural exports? Our ability to propel ourselves into a new orbit of growth critically depends on further currency and agricultural reforms.

The writer is a trader. She can be reached at ?sonali.ranade@hotmail.com or @SonaliRanade on Twitter