<p>Indian economy may take a hit from the US economic crisis due to fewer exports. The European crisis will not make things better. Countries like Germany account for a large share of our exports of carpets, for example. Reduced purchasing power in these countries will lead to fewer orders for our exporters. The impact of the Western crisis is transmitted to our economy in another way. The dollar and euro are likely to decline against the rupee. This will make our exports costlier in the western markets. Our exports are likely to decline. But whether this will be good or bad for the country is debatable.<br /><br />Argument is that rise in the value of rupee makes exports difficult and hits at employment in the economy. If this is true then, conversely, decline in the value of rupee should have led to creation of jobs. The rupee has declined from Rs 45-a-dollar presently. But only few jobs were created in the economy. The Economic Survey tells us that 77 lakh persons were employed in the organised private sectors in 1991. This increased to 99 lakh in 2008. The number of unemployed increased much during this period. The steep decline of the rupee in this period has not led to generation of much employment in the economy. Conversely, increase in the value of rupee may not have much impact.<br /><br />On the other hand, rise of the rupee may be beneficial for the economy as a whole even if it is harmful for the export-oriented sectors. This can easily be understood by an example. The price of India’s exports in the western markets rises with rise in the value of the rupee. A T-shirt costing Rs 500 would cost an American consumer $11 at the present exchange rate of Rs 45 per dollar. It would cost him $22 if the exchange rate rose to Rs 22 per dollar. Our importers would be able to import more goods with the same money. Our importers would be able to buy 22 American apples at $1 per apple instead of 11 apples previously. This will be beneficial for the Indian economy.<br /><br />If at all, problems arise because other exporters may grab our markets. That is unlikely to happen, however, because the decline of the dollar has a similar effect on all exporting countries. Rise of the rupee is fundamentally good for our economy. It means that our goods are of such good quality that we can obtain high price in the world markets. To say that rise of rupee is harmful is like saying the moonlight is bad because of the dark spot in the moon.<br /><br />It is moreover not clear whether the woes of the export sector are due to rise of the rupee. The policy of encouraging foreign capital inflows has to necessarily lead to decline in exports. <br /><br />Inflow of dollars<br /><br />The two main sources of inflow of dollars into our economy are from export earnings and foreign capital inflows. These dollars are purchased by importers and sent out of the economy. Accordingly an increase in foreign capital inflows has to necessarily lead to decline in exports.<br /><br />This decline in exports cannot be contained by giving incentives to exporters. For a given level of imports, an increase in foreign capital inflows has to necessarily lead to reduction in exports. The solution, if at all, is to increase imports. That will generate more demand for dollars by the importers and provide space for exporters to fill in the gap with increased export earnings. The Government should provide incentives to importers to solve the problem of exporters. It is particularly beneficial to provide import subsidy on goods that are not produced much in India like gold, phosphate fertilisers, tin, copper and MIG fighter airplanes.<br /><br />Another cause of exporter's woes is the entry of poorer countries in the global economy. Low-wage countries like Bangladesh and Vietnam are supplying goods like garments and coffee at low prices. This is pushing down the earnings and, therefore, wages in the export sectors in India. One can see this pressure on the IT and BPO sectors. Many companies have asked their employees to work for six days in a week instead of five earlier in order to reduce costs. This decline in export-oriented sectors should be accepted as an inevitable punishment of joining the global economy just as the sun burns the entire earth without sparing anyone. For these reasons we should not get much worried about the impact of the western economic crisis on our economy.<br /><br />The question of China remains. Indeed that country has maintained a low value of its currency Renminbi and pushed exports. But the jury is still out on this strategy. Three problems can be noted immediately. One low value of Renminbi implies greater poverty for the people as evinced in great social unrest. This is not visible, however, because of lack of democracy in that country. Second, China is deeply tied with the fate of the US economy. A collapse of the US economy will simply shatter China. Third, China is holding huge amounts of T-Bills issued by the US government worth about $ 1 trillion. The decline in the value of dollar is reducing the value of this huge investment. China is like the bank which gives more loans to a defaulting company and in the process gets neither the principal nor the interest. Thus our government should be wary of following the Chinese model and consider giving incentives to imports.</p>
<p>Indian economy may take a hit from the US economic crisis due to fewer exports. The European crisis will not make things better. Countries like Germany account for a large share of our exports of carpets, for example. Reduced purchasing power in these countries will lead to fewer orders for our exporters. The impact of the Western crisis is transmitted to our economy in another way. The dollar and euro are likely to decline against the rupee. This will make our exports costlier in the western markets. Our exports are likely to decline. But whether this will be good or bad for the country is debatable.<br /><br />Argument is that rise in the value of rupee makes exports difficult and hits at employment in the economy. If this is true then, conversely, decline in the value of rupee should have led to creation of jobs. The rupee has declined from Rs 45-a-dollar presently. But only few jobs were created in the economy. The Economic Survey tells us that 77 lakh persons were employed in the organised private sectors in 1991. This increased to 99 lakh in 2008. The number of unemployed increased much during this period. The steep decline of the rupee in this period has not led to generation of much employment in the economy. Conversely, increase in the value of rupee may not have much impact.<br /><br />On the other hand, rise of the rupee may be beneficial for the economy as a whole even if it is harmful for the export-oriented sectors. This can easily be understood by an example. The price of India’s exports in the western markets rises with rise in the value of the rupee. A T-shirt costing Rs 500 would cost an American consumer $11 at the present exchange rate of Rs 45 per dollar. It would cost him $22 if the exchange rate rose to Rs 22 per dollar. Our importers would be able to import more goods with the same money. Our importers would be able to buy 22 American apples at $1 per apple instead of 11 apples previously. This will be beneficial for the Indian economy.<br /><br />If at all, problems arise because other exporters may grab our markets. That is unlikely to happen, however, because the decline of the dollar has a similar effect on all exporting countries. Rise of the rupee is fundamentally good for our economy. It means that our goods are of such good quality that we can obtain high price in the world markets. To say that rise of rupee is harmful is like saying the moonlight is bad because of the dark spot in the moon.<br /><br />It is moreover not clear whether the woes of the export sector are due to rise of the rupee. The policy of encouraging foreign capital inflows has to necessarily lead to decline in exports. <br /><br />Inflow of dollars<br /><br />The two main sources of inflow of dollars into our economy are from export earnings and foreign capital inflows. These dollars are purchased by importers and sent out of the economy. Accordingly an increase in foreign capital inflows has to necessarily lead to decline in exports.<br /><br />This decline in exports cannot be contained by giving incentives to exporters. For a given level of imports, an increase in foreign capital inflows has to necessarily lead to reduction in exports. The solution, if at all, is to increase imports. That will generate more demand for dollars by the importers and provide space for exporters to fill in the gap with increased export earnings. The Government should provide incentives to importers to solve the problem of exporters. It is particularly beneficial to provide import subsidy on goods that are not produced much in India like gold, phosphate fertilisers, tin, copper and MIG fighter airplanes.<br /><br />Another cause of exporter's woes is the entry of poorer countries in the global economy. Low-wage countries like Bangladesh and Vietnam are supplying goods like garments and coffee at low prices. This is pushing down the earnings and, therefore, wages in the export sectors in India. One can see this pressure on the IT and BPO sectors. Many companies have asked their employees to work for six days in a week instead of five earlier in order to reduce costs. This decline in export-oriented sectors should be accepted as an inevitable punishment of joining the global economy just as the sun burns the entire earth without sparing anyone. For these reasons we should not get much worried about the impact of the western economic crisis on our economy.<br /><br />The question of China remains. Indeed that country has maintained a low value of its currency Renminbi and pushed exports. But the jury is still out on this strategy. Three problems can be noted immediately. One low value of Renminbi implies greater poverty for the people as evinced in great social unrest. This is not visible, however, because of lack of democracy in that country. Second, China is deeply tied with the fate of the US economy. A collapse of the US economy will simply shatter China. Third, China is holding huge amounts of T-Bills issued by the US government worth about $ 1 trillion. The decline in the value of dollar is reducing the value of this huge investment. China is like the bank which gives more loans to a defaulting company and in the process gets neither the principal nor the interest. Thus our government should be wary of following the Chinese model and consider giving incentives to imports.</p>
