India May See a Repeat of 1991 Crises

Alchemist

Administrator
Staff member
#21
Assuming that we cannot reduce our imports due to ever raising demand of oil and gold among others and increasing subsidies to retain vote share , what are the implications of devaluing the rupee. How does it effect the common man other than boosting the exports ? Thanks
A rupee devaluation will hurt the common man in the short and medium term, but the long-term benefits will be much greater.

Most developing and developed countries in Asia have been export powerhouses for long periods in the past.

Most of the major economies in Asia still have a trade surplus.

China has a trade surplus.
Taiwan has a trade surplus.
Singapore has a trade surplus.
South Korea has a trade surplus.
Indonesia has a trade surplus.
Malaysia has a trade surplus.
Thailand has a trade surplus.

Even Japan had a trade surplus till the massive earthquake in 2011 disrupted exports and forced Japan to increase its energy imports.

Hong Kong has a trade deficit, but Hong Kong has an entirely different economic model and is not comparable to other countries in Asia.

Countries like US have less to worry about trade deficits as their currencies are globally accepted.

Things are different for countries like India.

In the long-term, India can either have a stable currency or a large trade deficit. India can't have both.
 
#22
A rupee devaluation will hurt the common man in the short and medium term, but the long-term benefits will be much greater.
...
Alchemist,

For a country that imports far higher than its exports, how will a depreciating currency hold long-term benefits? Especially when imports are largely inelastic (oil, gold) and capital flows are not plugging the gap.
 
#23
Alchemist,

For a country that imports far higher than its exports, how will a depreciating currency hold long-term benefits? Especially when imports are largely inelastic (oil, gold) and capital flows are not plugging the gap.
Our exports become cheaper. The hope is that this should increase their demand more than that percentage by which dollar value of the same export has gone down.

i.e. if you are exporting 5 kg of coal per year @ Rs. 10 per kg (or at 1$ per kg)
and
1$ = Rs. 10

Then if 1$ = Rs. 15

Now you can sell coal at $.0.67 per kg.

If this doubles demand (very probable - the price has gone down considerably for the buyers), then you are now exporting 6.7$ worth of coal instead of 5$ worth of coal.

Put another way, does China have the ability to devalue because it has a huge positive trade gap or
does it have huge positive trade gap because it devalues?
 
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paran

Active member
#24
Our exports become cheaper. The hope is that this should increase their demand more than that percentage by which dollar value of the same export has gone down.

i.e. if you are exporting 5 kg of coal per year @ Rs. 10 per kg (or at 1$ per kg)
and
1$ = Rs. 10

Then if 1$ = Rs. 15

Now you can sell coal at $.0.67 per kg.

If this doubles demand (very probable - the price has gone down considerably for the buyers), then you are now exporting 6.7$ worth of coal instead of 5$ worth of coal.
You can't just pass the full benefit to the buyer. Since money is losing its value other input costs would go up too.
 

Alchemist

Administrator
Staff member
#25
For a country that imports far higher than its exports, how will a depreciating currency hold long-term benefits? Especially when imports are largely inelastic (oil, gold) and capital flows are not plugging the gap.
A large part of imports are inelastic, but not all imports.

Also exports can vary a lot depend on the exchange rates.

Just turnaround your mouse and you will know what I mean. I am sure it will say "Made in China".

It is totally possible to manufacture and export such simple products from India, but China has priced India out of the global market by undervaluing its currency.

If India allows it currency to take its natural direction, India too can become a manufacturing hub like China.

You can't just pass the full benefit to the buyer. Since money is losing its value other input costs would go up too.
Cost of imported inputs will go up, but many other costs like labor costs will not increase at the same rate as the currency depreciates.
 
#26
If India allows it currency to take its natural direction, India too can become a manufacturing hub like China.
The common man doesn't understand that currency devaluation is good for us. To the guy on the street, when the rupee becomes stronger, his chest swells with pride because he thinks that the it means that the country is stronger. What he doesn't realize is that China (which is so ahead of India that's its unreachable for India in the near and medium term) has become stronger due to currency devaluation (amongst lot of other things of course).

Even the Govt doesn't allow currency to go down too much because they it reflects negatively on them in the eyes of the common man.
 
#27
A large part of imports are inelastic, but not all imports.

Also exports can vary a lot depend on the exchange rates.

Just turnaround your mouse and you will know what I mean. I am sure it will say "Made in China".

It is totally possible to manufacture and export such simple products from India, but China has priced India out of the global market by undervaluing its currency.

If India allows it currency to take its natural direction, India too can become a manufacturing hub like China.



Cost of imported inputs will go up, but many other costs like labor costs will not increase at the same rate as the currency depreciates.
As a whole country, what is the net effect?

Lets say the rupee value halved. Cost of imports would rise significantly. Will the rise in exports offset this added cost?

Even if demand for our goods increased, do we have the capacity to supply increased demand?
 
#28
The common man doesn't understand that currency devaluation is good for us. To the guy on the street, when the rupee becomes stronger, his chest swells with pride because he thinks that the it means that the country is stronger. What he doesn't realize is that China (which is so ahead of India that's its unreachable for India in the near and medium term) has become stronger due to currency devaluation (amongst lot of other things of course).

Even the Govt doesn't allow currency to go down too much because they it reflects negatively on them in the eyes of the common man.
That's silly.

Devaluation of the Chinese currency is good for them because they are net exporters. Devaluation of our currency would be quite detrimental because we are net importers. We are currently running a twin deficit.

1) A fiscal deficit.
2) Current account deficit.

Both would be affected negatively by a currency devaluation. (In the long term however, the current account may be benefited because as imports become expensive people try to cut them down and exporters are encouraged by the devalued currency thereby theoretically decreasing the current account gap. However this depends on the relative elasticity of the price of the imports/exports.)

We try to counter the current account deficit by a capital account surplus but a currency devaluation would negatively affect that too.

The only respite is for the export oriented businesses.

As for the common man, the affect of devaluation of a currency depends on how he relies on it. If he is an NRI and gets his income in dollars he would enjoy the benefits of the weakened rupee. If he lives in India and works in an export oriented company, he will benefit as well. But for everyone else its of no benefit. (the degree of impact would be proportional to his reliance on imports).
 
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#30
Our exports become cheaper. The hope is that this should increase their demand more than that percentage by which dollar value of the same export has gone down.

i.e. if you are exporting 5 kg of coal per year @ Rs. 10 per kg (or at 1$ per kg)
and
1$ = Rs. 10

Then if 1$ = Rs. 15

Now you can sell coal at $.0.67 per kg.

If this doubles demand (very probable - the price has gone down considerably for the buyers), then you are now exporting 6.7$ worth of coal instead of 5$ worth of coal.
...
To follow the example, if India were exporting coal and the Rupee falls, are our importers likely to import more coal?

Coal is used primarily to generate energy and the demand is tied to existing energy generating capacity. Setting up additional capacity takes a long time and no one does it simply because at some point in time, coal is cheap.

What is most likely to happen is that those energy producers will enter in to futures contracts to lock-in some of the low prices.
 
#31
To follow the example, if India were exporting coal and the Rupee falls, are our importers likely to import more coal?

Coal is used primarily to generate energy and the demand is tied to existing energy generating capacity. Setting up additional capacity takes a long time and no one does it simply because at some point in time, coal is cheap.
Few things.

- If I was Country X and I was importing coal from Sri Lanka at 1$ per kg.
Now India has devalued their currency and started selling coal at 0.67$ per kg, I would transfer my order to India. So India's exports will increase, irrespective of whether the importer has increased their capacity or not.

- Capacities do get increased when prices change. For eg. When petroleum went high few years back, that's when a lot of Wind Energy, Solar Energy capacities got added. In the USA, now that natural gas has become cheaper, coal capacities aren't increasing (they would have increased otherwise).

- Coal was just an example - substitute it with whatever else is used at places which doesn't require a lot of initial investment. Or even take this example - the quotation which an Indian call center would given an American company would become cheaper than a Filipino one. So India can get back some of the call center business from the Philippines.
 
#32
few things.
- If I was Country X and I was importing coal from Sri Lanka at 1$ per kg.
Now India has devalued their currency and started selling coal at 0.67$ per kg, I would transfer my order to India. So India's exports will increase, irrespective of whether the importer has increased their capacity or not.
Would you really? Cheap raw material due to currency fluctuations are opportunistic. But nobody wants to put all eggs in one basket.

The Rupee is not the only currency depreciating. I think net-net no real competitive export benefit being accrued to India.

- Capacities do get increased when prices change. For eg. When petroleum went high few years back, that's when a lot of Wind Energy, Solar Energy capacities got added. In the USA, now that natural gas has become cheaper, coal capacities aren't increasing (they would have increased otherwise).
I did not understand this.

- Coal was just an example - substitute it with whatever else is used at places which doesn't require a lot of initial investment. Or even take this example - the quotation which an Indian call center would given an American company would become cheaper than a Filipino one. So India can get back some of the call center business from the Philippines.
What does India export that the world "needs" and would translate in to benefits for India if the currency falls?

BTW, the advantage of Phillipines is that they are culturally very aligned with the US. Customer's are very comfortable with Phillipines BPO centers. I doubt Rupee becoming cheaper is going to get significant business back.
 
#33
Would you really? Cheap raw material due to currency fluctuations are opportunistic. But nobody wants to put all eggs in one basket.

The Rupee is not the only currency depreciating. I think net-net no real competitive export benefit being accrued to India.
Don't get stuck on the 'coal' - it was just an example - I don't even know if we are exporting coal. But if we were, our exports would increase if we were able to sell it at a lower dollar price.


I did not understand this.
The threshold price for any energy alternative is the lowest price amongst all energies (not just the cost of the energy alternative per se, but the cost to convert it into a unit of energy & provide it to customers)

i.e. in the US petrol was around 1.5$ a gallon( a gallon is around 4 litres). So assume you can produce energy by burning petrol. and 1 Gallon produces 1 Unit of energy.

(again petrol is just an example - don't get stuck on petrol)

Now if one had to consider solar, solar would be feasible only if the cost of solar energy was less than 1.5$ per unit of energy. For many years, solar didn't take off because Solar energy cost per unit was much higher than other forms of energy (coal, petroleum etc). Then few years back, petroleum prices shot up (also at the same time solar panel prices also reduced). Suddenly solar became somewhat feasible - or at good enough to speculate that in a few years when panels become even cheaper, it would end up economically viable.

That's when a lot of solar panel producers suddenly started operations or increased capacities throughout the world.

i.e. Many Wind Energy & Solar Energy Installations owe their existence to high petroleum prices. In other words, capacities do increase/decrease based on price fluctuations of different forms of energy.


What does India export that the world "needs" and would translate in to benefits for India if the currency falls?
India exports around 300 billion dollars of stuff per year. I am assuming some of it most of it is what the world needs. Or are people importing from India for other reasons I don't know about.

BTW, the advantage of Phillipines is that they are culturally very aligned with the US. Customer's are very comfortable with Phillipines BPO centers. I doubt Rupee becoming cheaper is going to get significant business back.
Americans are more culturally aligned with Americans as compared to both Indians and Filipinos - so why aren't the call centers not located in the US itself?

As an aside, when I was in the US, I experienced a lot of phone support from American Call Centers (outsourcing of call centers hadn't started). Few years later, I also experienced Indian call centers from the US.

On the average, the American call centers were far superior in terms of resolving your issues. It wasn't a cheap operation (the only terrible service I have experienced was from ATT). People were good at their job - they didn't read out of a list of steps or a script. In the end, they moved to India because of cost. And if we become 1/2 the cost of Philippines, we will get back the business - it doesn't matter if they are more culturally aligned.
 

paran

Active member
#34
Cost of imported inputs will go up, but many other costs like labor costs will not increase at the same rate as the currency depreciates.
That is the reason I mentioned it as can't pass "FULL" benefit to the buyer.

As mentioned by arcus, all in all India is a net importing country.

What I think is that, if the Rupee is devalued first thing oil would cost more.

If oil costs more then it is linked to all of the items of a common man uses (vegetables, milk, other eatable items, bus/"auto" fare).

Loans which are taken in Foreign currency would cost more.

NRIs sending money to India would remain same but it would be converted to more money in India and wouldn't make imbalance in the system?

Even exports need to pay more to labors and their transportation costs would increase.

Also noticing the currency devaluation company at USA won't continue to pay the same amount. They would negotiate to bring down the cost.

If some country (for an example China) is losing business because of Rupee devaluation do they keep quite without any action?
 
#35
That is the reason I mentioned it as can't pass "FULL" benefit to the buyer.

As mentioned by arcus, all in all India is a net importing country.
This becomes a did the chicken come first or the egg come first argument.
The question to answer is
- Is India a net importing country because our currency is high
or
- Do we have to keep our currency high because we are a net importing currency.
What I think is that, if the Rupee is devalued first thing oil would cost more.

If oil costs more then it is linked to all of the items of a common man uses (vegetables, milk, other eatable items, bus/"auto" fare).
Even with current world oil prices, a litre of petrol/diesel costs somewhere between Rs.20-25 going out of the the gate of the oil companies(HPCL, BPCL etc). Everything else is taxes and surcharges.
If some country (for an example China) is losing business because of Rupee devaluation do they keep quite without any action?
That's the point. They keep devaluing and we continue to keep quiet, right?
 
#36
Don't get stuck on the 'coal' - it was just an example - I don't even know if we are exporting coal. But if we were, our exports would increase if we were able to sell it at a lower dollar price.
The argumnent is generic, not related to coal. Many currencies are depreciating, as a result India is not getting any net benefits. At best, benefits will be marginal.
 
#37
The argumnent is generic, not related to coal. Many currencies are depreciating, as a result India is not getting any net benefits. At best, benefits will be marginal.
I don't get it - My point was that we will get benefits if we devalue, not if other currencies devalue.

If other currencies devalue and we don't - we get stuff cheaper, but it screws our trade balance.
 
#38
... And if we become 1/2 the cost of Philippines, we will get back the business - it doesn't matter if they are more culturally aligned.
Absolutely correct if you consider something dramatic like 50% cost reduction. But is this realistic?

As things stand, there is no compeling reason for BPO business to shift to India. And will remain so even if INR depreciates a further 10%.
 
#39
I don't get it - My point was that we will get benefits if we devalue, not if other currencies devalue.
Actually I got side tracked.

To clarify my thinking:
- If Rupee falls, we will get marginal benefits on exports.
- Even if more export gains were possible, India is structurally not in a position to take advantage.
- Import costs will increase almost in line with currency changes. [A small allowance must be made that India may consume a little less oil at higher prices.]
- Gains on exports will not cover rise in import costs.
- As Rupee falls, as a whole the nation loses.
 
#40
I hope and pray that India faces a 1991-like crisis soon.

It took the crisis of 1991 to generate the political will to implement even basic economic reforms. We are again in a paralyzed state. Only a crisis can trigger progress now.
 
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