The 21st-century dislike of liberal economic policies in India, to plagiarize Oscar Wilde, is the rage of Caliban seeing his own face in a glass. Indeed, the sight of glittering processions of imported automobiles jamming the streets of a nation that, paradoxically enough, boasts itself hoarse that it runs the world’s largest food subsidy programme for the poor bears a precarious resemblance to Caliban’s countenance, when visible.
Liberal policies have come to stay, however, and along with them their inevitable appendages, such as the recent drubbing taken by the Indian rupee. The explanation unleashed on the unwary has been mostly obfuscating of course, even though there are at least three branches of professional knowledge that constitute expertise in this area; knowledge possessed by the stock market specialist, knowledge preached by professional economists and, finally, the all-questioning burden of knowledge under which cynical newsmen belabour.
To be fair to members belonging to the last of these classes, they rightfully asked two obvious questions: why should what’s happening be happening? And, when should what’s happening stop happening? The answer to the first question appears to be straightforward. If economic events are left to the workings of markets, occasional turbulences cannot be wished away. Markets are known to rise as well as fall. The price of dollars is no different from that of onions. And if the poor suffer more than the rich in the process, Caliban is likely to fuss over his face.
The answer to the second question must be obvious too. Simply put, it had best be a pregnant silence.
These, however, are rarely the answers offered by the specialists. And the stock market consultant steals a march over the economist in the game. He keeps a minute-by-minute track of the rupee value of the commodity to which the world’s avarice clings like parched leeches, namely, the American greenback. Without batting an eyelid, he churns out numbers born only three hours ago and predicts on their basis what the next few weeks are about to reveal. There is little to be surprised about it. His profession, after all, consists of advising people about gains to be made in split seconds. On occasions, they are backed up by arguments too, arguments that fluctuate between the preposterous and the grossly ludicrous. To quote from a real-life experience this author was exposed to not many weeks ago, the rupee’s debacle was ascribed by a stock market authority to the machinations of the non-resident Indian supporters of Narendra Modi.
Not that an economist does much better either, especially when he is required to predict the future. However, the economist’s business is not exactly concerned with producing numbers for tomorrow. Professional integrity requires him to dig out figures relating to the past and explain how the economy has been moving, not over the last 30 seconds, but over the last 30 years. Explaining the happenings over a long stretch of time and drawing lessons from them to guide the future course of the economy, it would seem, is what the discipline of economics ought to be concerned with. Economists’ prescriptions may often fail, and he will then need to search for missing links in his causal analysis.
If this viewpoint is not totally incorrect, then it is well worth our while to look back at the events spread over the last 20 years or more and ask how the rupee has behaved vis-à-vis the US dollar ever since we began to usher in our reforms. The balance of payments turns out to be a vitally important concept in this connection. The current and the capital account lie at the heart of the matter, though their details cannot be adequately addressed here. Suffice it to say that the current account captures the net inflows of foreign currency associated with non-asset transactions. Demand for dollars exceeding supply creates a current account deficit, leading the rupee to depreciate, that is, the rupee price of a dollar to rise. How has this account behaved since the 1990s? The following graph (Figure 1) illustrates. As far as merchandise trade goes, there has been a consistent deficit, and in spite of fluctuations, the gap has widened. Adding on other components of the current account, we see a revival between 2000-01 to 2004-05, but it has posited a deficit more often than a surplus, and during more recent years, the CAD has been rising.
How should this affect the rupee price of dollars? Quite obviously, the rupee will depreciate. What is expected to provide a floor to the depreciation though, or even raise it, is the net inflows arising from the capital account. The latter account is a far more complicated object than the current account, but it does, roughly speaking, capture net dollar inflows arising from transactions in assets in the international markets (by foreign institutional investors, foreign direct investments, commercial borrowers, the central bank and other entities). If these net inflows can more than offset the net outflows in the current account, then the overall supply of dollars exceeds the demand in the country and is expected to help the rupee appreciate.
Once again, a very rough measure of whether the current and the capital accounts have combined to produce a surplus of dollars in the country is shown by the change in dollar reserves in the central bank each year (along with the total accumulation of foreign reserves in its coffers). Figure 2 reveals the picture.
Except for the year 2008-09 and the period following 2010-11, the change in our reserves has been positive since 1990-91 and our total reserves have also been rising as a consequence (but for the period following 2008-09). What should this have done to our exchange rate vis-à-vis the dollar? Clearly, the rupee had to appreciate since our liberalization drive began. But what happened actually? Figure 3 demonstrates.
The rupee has been depreciating against the dollar, viewed in terms of the trend displayed by the average exchange rate prevailing each year. The average rate hides endlessly many details about daily fluctuations that the stock market specialist would be concerned with. This trend will have little relevance for real players in the market. But it reveals nonetheless that the rupee, notwithstanding our liberal policies, has in fact weakened over the long run.
The economist has an explanation to offer for this course of events. Why, indeed, has the rupee depreciated even as our dollar stock in the central bank has been growing? Our CAD notwithstanding, the more than compensating capital account inflows ought to have prevented a long-run rupee depreciation. Yet it did not happen.
The question is substantively different from the one that sent shock waves through the country following the American Federal Reserve chief’s announcement that the quantitative easing policy was about to be terminated. There was a daily fall in the rupee in the short run and the country began to panic. As soon as it became apparent though that this policy is not about to be immediately implemented, events turned around, proving thereby that the world economic order is governed more by US policy than by independent free markets. The rapid change in the rupee’s fortunes will surely keep the stockbrokers busy, but the economist has no reason to feel relieved by it. The long-run picture continues to be a dilemma. Since the rupee has been depreciating throughout our reform period. why have we suddenly woken up to the problem more than 20 years after it began?
The economist may need to face up to the question. But will he be able to? One cannot be sure. All economics could be quite useless after all, to plagiarize Oscar Wilde one final time.