-by Lord Gyan Guru
In a race for stronger currency value in the market every Indian wishes that why can’t be a one rupee is equal to one dollar. This is the question quite similar to why can’t we just print money and pay all the debt.
There are some pros and cons to the situation but let’s see what happens if all of a sudden or in very short period of time dollar equals to the rupee and everything else remains constant.
First of all the high value of currency does not guarantee the strength economy of the country, if it was so then Bangladesh would have had a stronger economy than Japan because
1 Bangladeshi taka = 1.41 Yen
Now if 1Dollar = 1Rupee, firstly Mukesh Ambani will be the richest man in the world. Secondly buying goods will be cheaper for Indians in international market because this situation will make imports cheaper, which is quite good for a developing country. Buying luxurious good will be very easy for Indians, simple example an iPhone 6 will cost only 650 rupee which is quite cheaper than the current market rate. As imports are going to be cheaper the price of petrol will be cheaper resulting in significant reduction in the cost of transportation of the goods around the country. This looks like a quite good scenario but this will not last long because other side of the story is completely different.
The exports will be quite expensive because Indian products will be expensive compared to other competing nations. As the Indian export market is booming quite a lot since the last few years, if it’s expensive why would any country buy things from India if they can buy it from the other countries with lower prices?
This will also lead to no foreign investment. The number one reason for the foreign investment in India is the cheap labor costs. Foreign companies will not be investing in India since it will turn out to be more expensive. IT services sector which contributes significantly to the Indian economy will be gone given that rupee will be equal to the dollar.
Why would any company pay to an employee twenty thousand rupees per month if they can hire someone in their own country who will do the same work for ten thousand? Even for routine jobs people wouldn’t pay four thousand rupees to the maid, instead they buy a nice thousand-dollar vacuum cleaner. So eventually people will lose jobs which will increase unemployment, plus the investment would not be coming to a country resulting into a complete economic slowdown and even the outsourcing of jobs in India will be gone.
Also the companies which are present in India will start to move out to countries which offer cost arbitrage.
A similar situation happened in 2008 when dollar was not as strong; the imports were very affordable but the BPO sector and the IT sector suffered a lot.
The situation of 1$ = 1Rupee is just not affordable for growing or developing country. Now what if someone says we don’t need investment. We use all the “Made in India” goods.
Well that will not work too. As a nation we’ve done that till 1990s and the economic growth happened when we let go that idea after liberalization. If we boycott foreign products then other nations would also do the same reducing our exports.
China has a fixed rate system in which government decides the value of currency and they devalue their currency against the dollar all the time just to capitalize on the export market. In the beginning of 2016. China did the same to make their exports lucrative. Our finance minister and RBI governor are not worried about the falling rupee rather they’re worried about the fluctuations in the market. The stabilization of Indian rupee is important thing, whether it might be at 50 60 or 70. Today if rupee is 60 and tomorrow it is 70 it’s too much fluctuation in a short period of time and not good for the economy as we have adopted floating rate system since 1975.
The finance minister and the RBI governor cannot decide the value of currency; it is the market supply and the demand of rupee which decides the value, but the finance minister and RBI governor have control over the policies of the country with which they try to maintain the value.
Remember it is just a different way to measure value.
1 mile = 1.6 kilometer
Whether you run 16 kilometer or 10 miles the distance is the same eventually.