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The writer, a visiting professor of international economic policy at Princeton University and the author of ‘India is Broken: A People Betrayed, Independence to Today’
While countries like South Korea and China strategically depreciate their currencies to enhance export competitiveness, Indian elites perceive even the slightest decline in the rupee’s value as a national humiliation. This misplaced pride dates back to the mid-1960s, influenced by a unique economic and political confluence. This obsession with a strong currency has hindered India’s export-driven growth and impacted job opportunities for low-skilled workers.
India faces triple challenges in exporting manufactured goods: a poorly educated workforce, low female labor force participation, and an overvalued currency. Addressing these issues, particularly education and female labor force participation, requires long-term efforts. However, a much-needed boost to Indian exports can be achieved through a more competitive currency, with a value of around 100 rupees per dollar rather than the current rate of 82.
In 1949, India intelligently devalued the rupee from Rs3.3 to Rs4.8 per dollar, which improved the competitiveness of its economy. Lower dollar sale prices allowed Indian manufacturers to earn profits and increase exports. Additionally, the higher cost of imports helped reduce the current-account deficit. Unfortunately, India failed to follow through with this strategy due to low productivity and high inflation, preventing the country from competing with countries like Japan in labor-intensive manufactured exports. The World Bank and IMF’s financial support further reinforced the misconception that currency devaluation was unnecessary.
When these institutions finally threatened to cease financing the deficit, Indian officials made the ill-advised decision to negotiate a rate of Rs7.5 per dollar in June 1966. However, this “too-little-too-late” devaluation failed to offset the rise in domestic production costs, resulting in Taiwanese and South Korean exports surging ahead while Indian exports lagged behind.
The perceived failure of the 1966 devaluation led to a loss of faith in an active exchange rate policy in India. Instead of implementing more aggressive nominal devaluations to counter rising production costs and achieve real depreciation, devaluations were always insufficient and delayed. China, for example, successfully employed aggressive exchange rate depreciation in the 1980s as a key driver of its export growth.
India briefly regained some sanity during the 1991 financial crisis. The rupee was devalued in July 1991 and allowed to float by March 1993. However, the currency became stronger due to factors such as software exports, remittances from Middle East workers, and the inflow of global investments into Indian companies. A strong rupee benefited a small elite in minimizing costs related to debt repayment and foreign investors. It also catered to the aspirations of those seeking luxury goods abroad.
Aligned with national pride and elite preferences, policymakers in India focused on preserving the currency’s value. Even when Narendra Modi, then a prime ministerial candidate, expressed concern about the falling rupee, stating “Our rupee has been admitted into the ICU,” the opposition used this phrase to ridicule the government when the rupee depreciated again.
Unfortunately, nominal depreciation alone wasn’t sufficient. According to the Bank for International Settlements, India’s domestic export production costs have increased by approximately 60% compared to its competitors since 1994. As a result, the real exchange rate, which determines international competitiveness, has become 12% stronger. Vietnamese manufactured exports, following the successful East Asian model, are poised to surpass those of India.
To overcome India’s accumulated cost-of-production disadvantage, the rupee needs to drop to around Rs90 per dollar, with Rs100 per dollar providing an ideal cushion. However, Indian authorities continue to avoid an active exchange rate policy and rely on ineffective measures such as tax cuts, corporate subsidies, tariff barriers, and weak labor protections. While these measures primarily benefit the wealthy, they do little to support low-skilled workers. Implementing a temporary exchange value of Rs100 per dollar would provide much-needed momentum to Indian exports. The time for action is now.
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