It has been observed that how discussions are being made on how foreign investment influences country's position in the global market. But what exactly happens and why Indian rupee and other currency influences the flow in the global market? Let's find out in this article.
Currency Exchange Rate
Conversion rates between two currencies is called Currency Exchange Rate. If it is set and managed by the government, then it is Fixed Exchange Rate, and when demand and supply influences the conversion rates, then it is called Floating Exchange Rate. There are number of other reasons for fluctuation like unemployment rate, inflation rate, GDP, import-export, type of products being made in a country,etc.
History
At the time of independence, the value of 1 Indian Rupee was equal to 1 USD. During 1950, the Indian government spent a lot on the development of the country but failed to earn as much. Various loans had been borrowed from other countries. Since the government hadn't had funds then to repay, the decision was made to devalue the Indian Rupee.
Devaluation of a currency happens when government increases the supply of currency by printing more currency. In the period of 1962-1973, There were several wars took place like India-China 1962, India-Pakistan 1965 and 1971, etc. where the country had to suffer heavy losses and consequently had to borrow more loans. At that time the foreign investment was required to boost the country's economy, which was possible only if foreign companies could get something out of their investment, i.e., cheap labor, incentives, etc. This is referred by the term Foreign Direct Investment (FDI).
The value of 1 USD was 7 Indian Rupees then. In 1973, due to huge oil crisis in the world; In 1984, assassination of PM Indira Gandhi led to shatter the confidence of foreigners in the Indian economy. In 1990, the value of 1 USD was 17.50 Rupees. But then, in 1991, Indian economy suffered one of the biggest shock; a heavy fiscal deficit was seen. The country went through economic liberalization and since then, the Rupee was kept to floating exchange rate due to which it kept devaluing.
Today, in 2022, the value of 1 USD is approx 74 Indian Rupee. There are several other factors why a currency is weaker than the other. The reason why US Dollar is strong also affects Indian Rupee. There are many currencies exchange in the global market and combined growth influences the ultimate result of a particular currency.
What if Rs.1 = $ 1?
Though this is an impossible situation, let's hypothetically imagine what if 1 Indian Rupee equals 1 US Dollar. The abroad travel for vacations would become cheaper, hence less difficulty. The abroad education would be much easier and cheaper to pursue. There would be less import rate of oil and other overseas product. This would ultimately result in reduction on many products that we use on daily basis from mobile to petrol.
In contrast, there are some serious disadvantages as well. If Rupee and Dollar becomes equal, foreign companies would not invest in India. Approximately 60% of the GDP is contributed by service sector, which is 27% of the total employment, comprises of IT company offices set up in India including call centers. If this happens, large scale unemployment would be seen all over the nation. E.g. Global recession 2008 and closing down of American company offices across the world.
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| Graph showing regular increase in foreign investments in India |
Indian IT sector is mostly invested by overseas MNCs because of the cheap labor they get from here. If Rupee equals the dollar, the foreign companies would see no benefit in hiring Indians. GDP and employment would suffer heavily because there are negligible alternatives available for foreign companies.
Should a currency be devalued or made stronger?
Logically, export-oriented countries prefer to keep their currencies weak. For e.g, China's currency is weak and that's why other countries prefer to buy Chinese products. If the currency of a country is weak, they could easily sell their goods and services to another country because at the latter, it would be cheaper.
On the other hand, import-oriented countries prefer to keep their currency strong in order to buy goods and services from another country. If they buy something from a country with stronger currency, it would be expensive for them. So they keep their currencies high for proper import of essential products.
Where does Indian currency stand?
India's import is more as compared to export. But interestingly, India's export has more contribution to the GDP. Indian IT sector is a major export to many foreign based companies which contributes heavily to the Indian economy. But India imports huge quantity of oil from Middle Eastern countries, and electronic items such as mobile phones and other gadgets that have always been expensive business to do.
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| Data of import and export of year 2018-19 |
Some economists suggest that Indian Rupee should either be kept stable or made weaker because it would result in exponential growth in economic sector but inviting large number of foreign companies to invest in India, resulting in more number of jobs and consequently the GDP would see a significant boost.
Contrary to this, some economists see Weakening of Indian Rupee by its own as a controversial issue. According to them, Devaluing the Rupee value is like devaluing the nation, which significantly works as a political tool too.
Now, the question arises that what would be beneficial for the economy? Devaluing of currency is floating in nature but our economy has been suffering immensely for the last few years. What's your opinion?
Thank you for reading:)
