Fall in Rupees is a blessing in disguise for Indian economy which is suffering from double cancer of stagnant industrial growth and lack of job creation? Critically discuss. (250 Words)

Mentors Comment:

Briefly discuss the reasons for the weakening of rupee in the intro and then in the next subheading, discuss the recent scenarios of industrial growth and employment in India. These two will form your first part of the answer.

Then discuss how a weak Indian rupee is helpful for our industry as well as job creation. Weak currency-profit for exporters-pick up of industrial growth-more production which will help in creating jobs-growth in agro-based industries-generate employment in agriculture sector—weak currency helps tourism which is a huge employment generating sector, etc.

Because the command of the question is to critically discuss, we have to discuss the other sides of the arguments as well. Therefore, weak currency-high import bill-increase in fuel prices-overall price rise in economy-import of expensive raw materials-already slow demand-will hurt profit margins in SME sector-inflation increase-interest rates hike by RBI-again bad for industry-bad for agriculture.

Give some solutions that will arrest this sharp swing of value of rupee on both sides.

Answer:

The Indian rupee is reeling under pressure. There are three major reasons. The rise in crude prices, outflows from India due to the selling of stocks, especially by foreign portfolio investors (FPIs), and a rising interest rate in the US.

Situation of industrial growth and job creation in India:

  • In the last couple of years, manufacturing has slowed down because of demonetization and GST.
  • The liquidity crunch ended up disrupting domestic production supply chains.
  • Small and medium-sized enterprises (SMEs) in manufacturing clusters are the worst affected..
  • In the meantime, the demand is being supplied by the imports because domestic manufacturing units, especially SMEs, had shut shop or significantly cut back on production.
  • Weak demand for exports from the developed countries as well as slowdown in the domestic demand has affected industrial growth.
  • Unemployment rates have been increasing gradually since 2017. 

Effects of weak rupee on industry as well as job creation:

  • Exports become cheaper and more competitive to foreign buyers. Therefore, this provides a boost for domestic demand.
  • Rupee depreciation raises the cost of raw materials and goods for import-dependent businesses. 
  • It puts them at a disadvantage vis-à-vis companies that are net exporters. 
  • So while rupee depreciation seems to be painful in the short term, it may turn out to be a blessing in disguise for the Indian manufacturing sector in the medium to long term.
  • A cheaper rupee will incentivise Indian companies to export more besides helping them substitute some of the costlier imported goods in the domestic market with local products. 
  • The increase in sales may boost economic growth and jobs, while increasing profits for industries conducting business in foreign markets.
  • Small and mid-sized export-oriented companies operating in labour intensive sectors benefits most with weak rupee.
  • Growth in manufacturing sector generates employment and employment generates further growth.
  • The SME sector, which is the backbone of supply chain in Indian manufacturing sector as well as export oriented, is labour intensive and with its growth, the employment scenario will also get better.
  • Travel to India gets cheaper thus helping the local industry.
  • Tourism sector provides employment to millions of people directly and indirectly.
  • A slump in the rupee against the dollar is set to impact farm commodities in one of the world’s top producing and consuming nations, making exports attractive.
  • It will increase the profit margins for the agro based industry which mainly rely on exports.
  • Any boost in agriculture sector will enhance the employment growth because the a better of India still relies on jobs in agriculture sector.

Other side of the argument:

  • With the US and Europe looking increasingly likely to slip into a recession, export gains due to a weak rupee may be limited.
  • Weak rupee keeps the cost of oil imports relatively high.
  • Higher oil import costs could translate into higher fuel costs, which will raise, or at least keep the pressure on the overall cost of economic activity which directly affects industries.
  • India has been making all efforts to attract foreign capital for its industries. A weak rupee impacts their return on capital and would starve India of foreign capital.
  • A falling currency, if the trend continues, could compel the RBI to keep policy rates high for a longer time. Rising interest rates are negatively impacting industry profits.
  • Weak rupee adds to the pressure on corporate margins through higher imported input costs. 
  • Gross margins of manufacturing sector will take hit because of higher raw material costs and stiffer competition.
  • In a period of stagnant wage growth, weak rupee can cause a fall in real wages. 
  • This is because it causes inflation, but if the inflation rate is higher than wage increases, then real wages will fall. Therefore its bad for employment as well.

What needs to be done:

  • Directly, the government and RBI cannot intervene to affect the value of rupee. It is driven by market forces.
  • What they can do instead is to work towards arresting the sharp swings in the value of rupee. 
  • This swing is more difficult to the overall economy than the appreciation or depreciation of rupee.
  • It is well established fact that FIIs keep bringing foreign exchange and taking it off, from time to time; we need to minimise the impact of these actions of FIIs on the value of rupee.
  • Hence, in the determination of exchange rate we have to bring in efficiency.
  • The RBI will have to tighten the supply of money. This may help contain dollar outflows from investors seeking higher yields in the U.S., thus shoring up the value of the rupee. 
  • The RBI might also look to intervene directly in the foreign exchange market by selling directly in the open market, to prop up the value of the rupees.
  • Many of India’s exports today have significant import components. Create indigenous sources of supply, where possible, for imports that form parts of exports to provide a cost advantage, or at least reduce the cost disadvantage. 

Depreciation of rupee is no good omen for India. Though, whenever rupee gets weaker exporters are very happy. However, we need to understand that weaker rupee multiplies our problems, causing imports to get dearer. People, who have already been reeling under high fuel prices, may face dual attack due to weakening of rupee as well as slowdown in the market. We can not arrest the free fall nor help it appreciate, directly. What we need to do is curtail the frequent sharp swing of the currency.

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