The Rupee has been sliding lately. The price of the Rupee was hovering around Rs 64 to a US Dollar for the last few years. Recently it has slid to Rs 67 and analysts expect it to further decline to about Rs 70 to a Dollar.
The price of theRupee is determined in our foreign exchange market. It is similar to how the price of potato is determined in the weekly street corner market. The price increases if there are large numbers of customers wanting to buy potatoes but the supply is less.
Similarly,the price of the Dollar in our foreign exchangemarket increases if there are large numbers of customers wanting to buyDollars but the supply is less. The increase in the price of the Dollar means that the supply is less but the demand is more.
Thus the price of the Dollar has increased from Rs 64 to Rs 67; and the value of the Rupee has declined correspondingly.Why is the supply of Dollars less? The first reason is that our exports been weak. The Dollars sold by our exporters in our foreign exchange market are less.
The second reason is that foreign investment is declining. Foreign Investors sell the Dollars in our foreign exchange market and convert them intoRupees. Then they invest the Rupees in buying equities or bonds in our share
markets, which is known as (FII).
We received FII of about USD 14 Billion in January to April 2017. This has declined to a meager 0.3 Billion USD in Januaryto April 2018. The supply of Dollars has reduced both from exports and foreign investment.
The demand for Dollars has increased at the same time. The immediate cause is the increase in the global price of crude oil. We are hugely dependent on imports of oil.
The price of crude oil has increased in the recent times from USD 60 to Rs 80 per barrel. Therefore, the demand for Dollars by oil-importing companies like the Indian Oil Corporation has increased.
We are also importing more manufactured goods like eye glasses and footballs. In conclusion, the supply of Dollars from exports and foreign investment hasbeen declining while the demand for Dollars for the import of oil and othercommodities has been increasing.
The price of Dollar has increased and that of the Rupee has declined because of this mismatch.We cannot do anything about the increase in the price of oil in the globalmarkets.
However, we could earn more Dollars. The question is why our exports have not increased? Reason is that the cost of production is high in India. For example a T-Shirt made in India may cost Rs 200 while a T-Shirt of the same quality may cost Rs 150 in China.
Our T-Shirt manufacturer will not be able to export in such a situation. On the other hand, our retailers would
like to buy imported T-Shirts from China.The NDA Government has made huge improvement in infrastructure.
Highways are being built at a rapid pace.
There is improvement in the rail infrastructure. The spread of internet has taken place due to the expansion of
mobile telephony. This improvement in infrastructure has reduced the cost of production. The slow growth of our exports, therefore, cannot be blamed on the poor infrastructure.
So what is leading to high cost of production in India?
Mr. Michael Sneyd, global head of foreign exchange strategy at BNP Paribas has mentioned education, ease of business and labour productivity as the other reasons for high cost of production in India.
Our education system continues to be dominated by Government Universities which have become certificate printing machines. The graduates do not have the basic skills to engage in productive employment.
Their focus is to obtain a government job which does not require high productivity. Therefore, we have large numbers of educated unemployed coexisting with a shortage of employable candidates. The second factor is continued unease of doing business.
Corruption at higher levels has been much controlled in the last four years of the NDA Government.
However, corruption at the ground level continues unabated and may even have increased.
The NDA Government has not implemented any systemic measures to stamp out corruption at the lower levels. A Bengaluru-based exporter of auto parts said that the NDA Government has made a rule that requires the exporter to provide a certificate form a Chartered Accountant with every consignment.
The time taken to establish an inter-state power transmission line, or to settle a case in the High Courts or the Supreme Court—which are in the domain of the Central Government—remains unchanged.
The time taken to obtain a driver’s license or an electricity connection—which are in the domain of the State Governments—also remains unchanged. The third factor contributing to the high cost of production is low labour
One manufacturer of cables said that the wages in India are comparable to those in China but the output per worker in China is nearly double that of India.
Indian Labour Laws are so much tilted towards providing protection to the workers that it is impossible for an industrialist to extract high productivity from them.
The unavailability of truly “educated” workers, the load of corruption, the delays in judiciary and the low labour productivity are contributing to high cost of production in India.
Thus our exporters are being priced out of the global markets, we are earning fewer dollars from exports and the rupee is sliding. We should not take the upswing in corporate earnings as an indicator of good health of our economy.
Demonetization and GST have made it difficult for small businesses to survive. The market has been taken over entirely by large corporations. The cable manufacturer cited above also said that his sales constituted one-half each to the small traders and large Original Equipment Manufacturers (OEMs) before Demonetization and GST.
Now 90 percent of the sales are taking place to OEMs. The revival of profits of the corporate sector is, therefore, the flip side of decline in production from small industries.We need to take deep steps to rectify the situation.
One, we must improve our education system, implement systemic measures to stamp out corruption at the lower levels, reduce delays in the judiciary and simplify labour laws in favour of labour productivity.
Two, we must shift from manufacturing to services. The requirement of energy per Rupee of GDP is about 10 times in manufacturing as compared with services like software production and medical transcription.
That will reduce the requirement of energy and our demand for oil. The Rupee will continue to slide of we do not
take these measures.