Dollar Vs. Rupee

CA Rohit Krishan Varshney

Background

Recently up and down of rupee have shaken the Indian economy. At the same time India is facing the difficulty to reach at the international level. It is a different thing that new Governor of RBI and steps taken by the Government has sustained the Indian economy, but this situation always remains same. So, there should be an effective and long term solution, but before finding the solution, we have to understand the relation and effect with the US dollar.

For understanding the effect, we have to understand the Indian economy in short. The Indian economy has book keeping of any income and expenses in an account, which is known as “Fiscal Account”. Also the Indian economy has book keeping of mainly purchase of goods and services from foreign (import) and sale of good and services to foreign (export) in an account, which is known as “Current Account”. In this way, if expenses are more than incomes then it is a fiscal account deficit and if imports are more than exports then it is a current account deficit. Both the deficits are known as “Twin Deficit”. In any country if both the deficits are more, then poor situation of that country’s economy. But in the era of the globalisation, to some extent both deficits remain in any country’s economy.

If we talk about fiscal deficit, the total expenditure has a big portion of unplanned expenditure and planned expenditures are utilised to build the infrastructure like railway, bridge, road, human resources etc. Mainly four things cover in the unplanned expenditures which are A.I.D.S. (A- Administration Expenditures, I- Interest on borrowings, D- Defence expenditures, S- Subsidy). In this, the main portion is Subsidy which is a constant source of trouble.

If we talk about current account deficit, most of the expenditures on import are incurred on crude oil, gold and coal.

Relationship between Current Account Deficit and fiscal Account Deficit

We pay the US dollar for imports. So, it is an outflow of US dollar from a country and we receive the US dollar from exports. But due to current account deficit, there is a deficit in our country’s foreign currency fund.

Government gives the subsidy on import of crude oil that is why the burden of subsidy increases fiscal account deficit.

Impact of Current Account Deficit and Fiscal Account Deficit on our country

Current account deficits decrease foreign currency fund. Therefore, the value of rupee devaluate in comparison to the existing foreign currency fund. We can understand this from an example:

Let India has $ 10 and R 100. It means that $ 1 = R 10. Now due to more imports, India has $ 5. It implies that $ 1 = R 20 i.e. the value of dollar has increased and rupee has devalued.

In this import, most of the expenditure has incurred on crude oil. Therefore, there is burden on fiscal account deficit. In this way, our foreign borrowing capacity decreases due to excess expenditure. Therefore, the rating agencies decrease the rating of India and there is a difficulty to getting the foreign loan. If loan has not received, then there will be less expenditure, less production, less supply. Because the demand is more, the value of goods will be increased and there will be more inflation in a country. On the one side there will be inflation and then the people’s capacity of expenditure will decrease. Therefore, less demand, less supply, less employment and the country will suffer from recession.

Recently, due to increase in import of gold and crude oil, rupee has devalued and also inflation has increased. Later on we saw the image of recession. Recently, we can see the situation of stagflation (situation of recession with inflation) in India.

Causes of Rupee devaluation

1. More import of Gold and Crude Oil.

 

 

 2. Due to inflation incurred in 2008, USA introduced lending of loan at a cheaper rate in his country so that the economy grown. But, the people got the loans and invested in developing countries. In this order, the Indian economy risen. But, now the Governor of Federal Bank, USA Ben Barnarke issued the bond at a higher rate for getting the loan. Whereby the US dollar is reducing in whole country and US dollar becomes stronger. Therefore, people is withdrawing their money from developing countries and investing to the USA economy. Whereby the USA economy is becoming stronger and the economy of developing countries like India is becoming weaker.

3. Due to lack of technology in India, the demand of coals by electric plants is not fulfilled by Coal India. Therefore, we have to import the coal.

4. Due to Government’s policy deadlock, industrial production has not increased and the rupee has devalued. In this way, there is neither export and nor supply of goods in a country. Whereby current account deficit and fiscal account deficit has increased.

5. The crude oil’s price has increased due to the attack’s warning from USA on Syria etc.

These are the mainly reasons for devaluation of rupee.

Steps taken by the Government for preventing the devaluation of rupee

1. Increasing the price of Petrol and Diesel, the Government has done the efforts to reduce the import. Under this way, Government will increase the price 50 paisa per month on oil.

2. For reducing the import, increased the import duty on Gold from 4% to 6%.

3. For increasing the export, increased the subsidy on export loan from 2% to 3%

4. To open mostly every sector for FDI. In FDI, a foreign company comes with the US dollar and invests in rupee. Whereby the foreign currency fund increases.

These are the mainly steps taken by the Government.

Impact of Food Security Bill

Recently, The Indian Government has passed the Food Security Bill. In this bill, approxly R 1,25,000 crores will be spent every year wherein R 72,000 crores is subsidy. On the one hand the scheme is good because 67% of population of India shall get the food. But, the burden of subsidy will increase the fiscal account deficit. In this year, the Government will give R 25,000 crores subsidy for Food Security. To also consider this thing, rating agencies has dropped our rating.

Is devaluation of rupee harmful in every situation?

Profit of devaluation of rupee goes to exporter because in export, any goods is made by investing in rupee and sold in US dollar. In this way we get the US dollar, convert the US dollar into rupee and get much more money. We can understand this by an example:

Let India has $1 = 10 and the cost of exporter is R 100. It means the cost is equivalent to $ 10. If there is a devaluation of rupee and $ 1 = R 20, then exporter will get R 200 in conversion of $ 10. Thus, he will earn R 100 profit although he is selling at cost only.

Due to the devaluation of rupee, we can earn a handsome profit by reducing the price of our goods. But, India can’t benefit through this because there is a delay in granting the approval to projects due to policy deadlock which is the cause of delay in delivery of goods.

Author’s opinion

1. There is a need of long term policy for Industrial sector.

2. To aware the people for impact of Gold in our economy instead of restrict the demand of Gold.

3. To remove the policy deadlock and grant the approval to the project immediately. The Government is doing the work on this phase.

4. There will always a relation between US dollar and rupee. Therefore, incline towards Shail Gas instead of petrol and diesel and to be self-reliant in every sector.

5. To distribute more allocation of budget on Research and Development so that we can self-reliant in technology.

6. Agriculture is a backbone of every sector. Therefore, agriculture is to be converted into commercial farming instead of subsistence farming.

We can’t get the immediate solution from aforesaid argument, but can get the solution slowly because whole world is in the era of globalisation. Thus, the relation from US dollar can’t break, but can reduce the impact of devaluation of rupee.

CA. Rohit Krishan Varshney

  B.Com  (Hons.), CA

 

Background

            Recently up and down of rupee have shaken the Indian economy. At the same time India is facing the difficulty to reach at the international level. It is a different thing that new Governor of RBI and steps taken by the Government has sustained the Indian economy, but this situation always remains same. So, there should be an effective and long term solution, but before finding the solution, we have to understand the relation and effect with the US dollar.

            For understanding the effect, we have to understand the Indian economy in short. The Indian economy has book keeping of any income and expenses in an account, which is known as “Fiscal Account”. Also the Indian economy has book keeping of mainly purchase of goods and services from foreign (import) and sale of good and services to foreign (export) in an account, which is known as “Current Account”. In this way, if expenses are more than incomes then it is a fiscal account deficit and if imports are more than exports then it is a current account deficit. Both the deficits are known as “Twin Deficit”. In any country if both the deficits are more, then poor situation of that country’s economy. But in the era of the globalisation, to some extent both deficits remain in any country’s economy.

            If we talk about fiscal deficit, the total expenditure has a big portion of unplanned expenditure and planned expenditures are utilised to build the infrastructure like railway, bridge, road, human resources etc. Mainly four things cover in the unplanned expenditures which are A.I.D.S. (A- Administration Expenditures, I- Interest on borrowings, D- Defence expenditures, S- Subsidy).  In this, the main portion is Subsidy which is a constant source of trouble.

            If we talk about current account deficit, most of the expenditures on import are incurred on crude oil, gold and coal.

 

Relationship between Current Account Deficit and fiscal Account Deficit

            We pay the US dollar for imports. So, it is an outflow of US dollar from a country and we receive the US dollar from exports. But due to current account deficit, there is a deficit in our country’s foreign currency fund.

            Government gives the subsidy on import of crude oil that is why the burden of subsidy increases fiscal account deficit.

 

Impact of Current Account Deficit and Fiscal Account Deficit on our country

            Current account deficits decrease foreign currency fund. Therefore, the value of rupee devaluate in comparison to the existing foreign currency fund. We can understand this from an example:

Let India has $ 10 and R 100. It means that $ 1 = R 10. Now due to more imports, India has $ 5. It implies that $ 1 = R 20 i.e. the value of dollar has increased and rupee has devalued.

In this import, most of the expenditure has incurred on crude oil. Therefore, there is burden on fiscal account deficit.  In this way, our foreign borrowing capacity decreases due to excess expenditure. Therefore, the rating agencies decrease the rating of India and there is a difficulty to getting the foreign loan. If loan has not received, then there will be less expenditure, less production, less supply. Because the demand is more, the value of goods will be increased and there will be more inflation in a country. On the one side there will be inflation and then the people’s capacity of expenditure will decrease. Therefore, less demand, less supply, less employment and the country will suffer from recession.

Recently, due to increase in import of gold and crude oil, rupee has devalued and also inflation has increased. Later on we saw the image of recession. Recently, we can see the situation of stagflation (situation of recession with inflation) in India.

 

Causes of Rupee devaluation

1.    More import of Gold and Crude Oil.

 

 

 

2.    Due to inflation incurred in 2008, USA introduced lending of loan at a cheaper rate in his country so that the economy grown. But, the people got the loans and invested in developing countries. In this order, the Indian economy risen. But, now the Governor of Federal Bank, USA Ben Barnarke issued the bond at a higher rate for getting the loan. Whereby the US dollar is reducing in whole country and US dollar becomes stronger. Therefore, people is withdrawing their money from developing countries and investing to the USA economy. Whereby the USA economy is becoming stronger and the economy of developing countries like India is becoming weaker.

 

3.    Due to lack of technology in India, the demand of coals by electric plants is not fulfilled by Coal India. Therefore, we have to import the coal.

 

4.    Due to Government’s policy deadlock, industrial production has not increased and the rupee has devalued. In this way, there is neither export and nor supply of goods in a country. Whereby current account deficit and fiscal account deficit has increased.

 

5.    The crude oil’s price has increased due to the attack’s warning from USA on Syria etc.

 

These are the mainly reasons for devaluation of rupee.

 

 

Steps taken by the Government for preventing the devaluation of rupee

1.   Increasing the price of Petrol and Diesel, the Government has done the efforts to reduce the import. Under this way, Government will reduce the price 50 paisa per month on oil.

 

2.   For reducing the import, increased the import duty on Gold from 4% to 6%.

 

3.   For increasing the export, increased the subsidy on export loan from 2% to 3%

 

4.   To open mostly every sector for FDI. In FDI, a foreign company comes with the US dollar and invests in rupee. Whereby the foreign currency fund increases.

 

These are the mainly steps taken by the Government.

 

Impact of Food Security Bill

            Recently, The Indian Government has passed the Food Security Bill. In this bill, approxly R 1,25,000 crores will be spent every year wherein R 72,000 crores is subsidy. On the one hand the scheme is good because 67% of population of India shall get the food. But, the burden of subsidy will increase the fiscal account deficit. In this year, the Government will give R 25,000 crores subsidy for Food Security. To also consider this thing, rating agencies has dropped our rating.

 

Is devaluation of rupee harmful in every situation?

            Profit of devaluation of rupee goes to exporter because in export, any goods is made by investing in rupee and sold in US dollar. In this way we get the US dollar, convert the US dollar into rupee and get much more money. We can understand this by an example:

Let India has $1 = 10 and the cost of exporter is R 100. It means the cost is equivalent to $ 10. If there is a devaluation of rupee and $ 1 = R 20, then exporter will get R 200 in conversion of $ 10. Thus, he will earn R 100 profit although he is selling at cost only.

            Due to the devaluation of rupee, we can earn a handsome profit by reducing the price of our goods. But, India can’t benefit through this because there is a delay in granting the approval to projects due to policy deadlock which is the cause of delay in delivery of goods.

 

 

 

 

Author’s opinion

1.    There is a need of long term policy for Industrial sector.

 

2.    To aware the people for impact of Gold in our economy instead of restrict the demand of Gold.

 

3.    To remove the policy deadlock and grant the approval to the project immediately. The Government is doing the work on this phase.

 

4.    There will always a relation between US dollar and rupee. Therefore, incline towards Shail Gas instead of petrol and diesel and to be self-reliant in every sector.

 

5.    To distribute more allocation of budget on Research and Development so that we can self-reliant in technology.

 

6.    Agriculture is a backbone of every sector. Therefore, agriculture is to be converted into commercial farming instead of subsistence farming.

 

We can’t get the immediate solution from aforesaid argument, but can get the solution slowly because whole world is in the era of globalisation. Thus, the relation from US dollar can’t break, but can reduce the impact of devaluation of rupee.