What will happen if $1=₹1?
Updated: Jun 17, 2020
Since independence, there has been a constant fight between ₹ and $. Every day, we see investors and economists keeping an eye on the ₹:$ ratio or exchange rate, and give predictions on its impact or repercussions on the Indian economy. Although the Indian economy as of now is growing at a much faster rate than The United States of America, we observe that the value of Indian rupee is falling against that of the US dollar. Does having a stronger currency means that country's economic condition is more stable?
Before 1947, since India was under British rule, the Indian rupee was pegged against the pound sterling. Just like in India, 16 annas or 100 paise equals one rupee, in The United Kingdom 1£ = 20 shillings, and 1 shilling equals 12pence, which determines £1 = 240 pence. The reason behind this was that 240 coins of 1 penny have a weight of 1 lb. Till 1966, the Indian rupee was not pegged to the US dollar, however pound sterling was valued against the dollar. In 1947, 1£ = $4 and ₹1 = 18 pence or 1£ = ₹13.34 (approx), which determines $1 = ₹3.34 (approx). In 1966, when the rupee was pegged against the US dollar, its value was determined to be $1 = ₹7.5.
We might as well reasonably dispute whether it is the upper or the under the blade of a pair of scissors that cuts a piece of paper, as whether the value is governed by demand or supply.
By Alfred Marshal, The Economist.
Although, now the condition of the Indian economy is not the same as it was in the year 1947. The economy has flourished and is one of the fastest-growing economies of the world but still, the value of the Indian rupee is falling in the international exchange rate. In case, with the same financial and economic scenario, the USA and India follow a fixed exchange rate system (same as the USA and China), and ₹1 will become equal to $1, would it solve all the economic problems that India faces?
One major advantage that India as a nation would face is the rise in imports. Due to a fixed exchange rate system where $1 ₹1, international goods will become very cheap in the Indian market, which would make people prefer foreign goods over domestic Indian goods. In fact, there will be a huge inflow of luxurious items in India. Things such as expensive wristwatches, paintings, automobiles, gadgets, and electronic items will be available at a very cheaper rate, as compared to their current market price. The price of the iPhone 11 pro max (256 GB) in India as of 13th June 2020 is ₹131,900. Imagine this product being sold at only at ₹1,249. Wristwatch brands such as Rolex, Patek Phillipe, Richard Mille, etc. would be as cheap as a local wristwatch brand that everyone could afford.
Petrol and oil prices in India have very high taxation on them. The prices of crude oil are determined in terms of the US dollar, in the international market, hence every country needs to keep a proportion of US dollars in their foreign reserves, in order to trade oil in the international market. The price of 1 litre of petrol in India ranges from ₹71 to ₹79, each state has its own price. Imagine if this 1 litre of petrol in India is sold at a price of ₹1 per litre. It would significantly decrease our transportation costs. Price of public transports such as buses, auto-rickshaws etc. would fall. People would prefer to buy more automobiles rather than using public transport since the price of an automobile and its maintenance, both would go down.
Though the advantages that India might face under this special scenario seems to be very effective and would solve all major problems such as petrol prices, income inequality etc. however, these pictures of a falsified economy growth will only be short-lived. Considering the significant fall in the price of luxury goods in India, would they still hold the same prestige? The reason why people buy these goods are that it is of high price and only a few people could afford them. If your domestic helper and rickshaw driver could also afford an iPhone 11, no one would purchase an iPhone in India as it won't give the same sense of superiority to its possessor. These goods are called "ostentatious goods", meaning they are demanded because of their high price.
With the fall in commodity prices such as crude oil, gold, etc. there will be a drastic increase in their market demand, but how will the government keep up with the supply? If one litre of petrol is valued at ₹1.5, do you think people in India would consume it judiciously? The environmental and social cost that the country will have to bear would be much higher than its economic gain. The rise in pollution levels, traffic jams, exhaustion of natural resources etc. are some problems that are already prevalent currently at a very large scale.
It has been said that arguing against globalization is like arguing against the laws of gravity.
By: Kofi Annan, 7th Secretary-General of The United Nations.
In the year 1991, by the guidance of P.V Narasimha Rao and then finance minister, Dr Manmohan Singh, India successfully adopted LPG (liberalisation, privatisation and globalization) which would encourage foreign multi-national corporations to set up offices and factories in India which would boost FDI (foreign direct investment) in India. Under this special scenario where ₹1 = $1, no multi-national corporation would set up any base in India in fact, the existing ones might as well go back. The reason why companies come and invest in India is that they find cheap labour in this country. In case the salary of an average worker in India goes up to $7,000 a month, no company would be able to afford that. Moreover, Indian companies would like to set up offices and factories overseas since they would bear a lesser cost of maintenance in terms of rents, wages and salaries. This would lead to a huge unemployment problem in India since the existing foreign companies would exit the Indian market and the domestic firms would move overseas.
FII (foreign institutional investors) is an investor or an investment fund investing in a country outside of the one in which it is registered or headquartered. The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the Indian company and 10 per cent for NRIs/PIOs. A fixed exchange rate between rupee and the US dollar would discourage foreign investors from investing in the Indian stock market. Since in the Indian markets, the value of one share will rise significantly as compared to what it was before. No investor would be willing to pay $178 for one share of SBI (State Bank of India), in fact, few companies such as MRF have share prices as high as ₹60,000.
Moreover, the local Indian investors would also be willing to exit the Indian stock market and would prefer to invest overseas in stock indices such as NASDAQ, NYSE etc. since the value of shares of overseas companies would drastically fall in terms of rupees. One could easily pay ₹187 for a stock of Microsoft Corporation.
In the past, we have noticed that whenever the stock market crashes, the investors tend to exit the market and invest their money in the commodities market. In a situation where the commodities are valued at such a low price, an investor would prefer to invest there, which would eventually drive out all the money form the Indian stock market.
A nation may import to a greater value than it exports for half a century, perhaps, together; the gold and silver which comes into it during this time may be all immediately sent out of it; its circulating coin may gradually decay, different sorts of paper money being substituted in its place.
By: Adam Smith, Father of Economics.
BOT (balance of trade) is the difference between the value of goods and services that a country imports and the value of goods and services that a country exports, for a given time period. It is the largest component of a country's BOP (balance of payments). With appreciation in the value of the currency, there is a huge probability that the nation might not be able to increase its exports since the domestically manufactures products would be more expensive in the international market similarly, the country would import more products since the products that manufactured overseas would become comparatively cheaper. However, this is not the ideal situation for a country. Every company aims to avoid a trade deficit, which means X-M < 0 (X- exports, M- imports). In case the value of the exports of anation is greater than the value of its imports, this would imply that the country is earning more by trading with other nations, hence we have seen many times where China has devalued Yuan (purposely decrease your currency's value), in order to increase its exports.
In a scenario where ₹ and $ are valued equally, there are chances that India might face a huge trade deficit since this would make foreign goods cheaper, and would significantly increase the price of Indian goods in the international market. This would discourage local producers to produce more and would lead to a serious recession in the Indian economy.
One might argue that we could boycott foreign goods, but that's not how geo-political relations work. Boycotting Chinese products would also mean that China would boycott Indian products, where India's export share out of total exports globally to China is 5.08% (US$ 16,366 million), and China's export share out of all its exports globally to India is 4.07% (US$ 13,132 million), which means we are more dependent of China for our foreign exchange than they are on us.
A fixed exchange rate system between USD$ and ₹ would also appreciate the value of Indian currency in terms of other currencies. Since every country requires USD$ in order to trade as commodities are valued in $. In this case, a country has 2 options except what they earn on exporting their goods. For buying USD$ directly from the international market, they could purchase USD$ or first purchase Indian rupee and then purchase USD$ from that. The second option will be cheaper.
For instance, the rate of 1£ = $1.13. Incase France wants USD$ it could purchase by giving 100£ and get $113, but if France purchases Indian rupee @ 1£ = ₹85, it could get ₹8,500 for 100£ and could further exchange that rupee to $8,500 by giving the same amount that is 100£ (Note: We assume that there are no tariffs imposed on such transactions). Hence, this would increase the demand for Indian rupee globally.
Another huge crisis that India might face will be "brain drain" meaning, the emigration of highly trained or qualified people from a particular country. People might start selling all their assets in India and move abroad to settle since there is a lot of difference between what ₹1,000,000 values in India and $1,000,000 in The United States of America.
Appreciation of currency's value has its own drawbacks, but that doesn't mean that devaluation of the currency is its solution. What we fail to understand is that the Ministry of Finance and the Reserve Bank of India constantly try to minimize the fluctuations caused by appreciation or depreciation in foreign exchange rates. How beneficial is strengthing of the currency also depends on the current prevailing situation in the economy, as we have already seen how it can cause unemployment, unfavourable situation in the financial markets etc. Strengthing rupee in the year 1992 would have been the wrong step, at that time devaluation of rupee was the only possible way. A currency's value in the international market is not enough to justify its economic strength.