As the rupee weakens and inflation rises, strategic economic reforms to boost domestic manufacturing and reduce import dependency are urgently needed
The rupee hit a record low against the US dollar on August 5th and was trading at 84.09 per dollar. This is the biggest fall ever seen in the rupee and the rupee has reached its all-time low. If the currency of any country is stronger than other currencies, then the country is considered strong. In this globalized world, the value of every country's currency against the US dollar not only impacts the economy of that country but also affects the prices of many things in the market.
Rupee has Fallen 20 Times since Independence: The rupee has fallen almost 20 times since independence; in 1948, 1 dollar was equal to 4 rupees. At that time there was no debt in the country, then when the first five-year plan was implemented in 1951, the government started taking loans from foreign countries and then the value of the rupee also started decreasing continuously.
The continuous outflow of foreign funds from financial markets and crude oil has increased pressure on the rupee. The economy around the world has seen two major shocks – the COVID-19 pandemic and the Ukraine, Israel conflict. India is also not untouched by this. Today, the condition of currencies in major markets around the world is weak.
Dollar as King: According to the International Standard Organization list, there are a total of 180 currencies around the world, but among them, the American currency 'Dollar' has become a global currency. The price of most of the things exported is paid in dollars.
Today the dollar is involved in 80 percent of the world's trade. The US dollar has the status of a global currency, which is why the value of the rupee against the dollar shows whether the Indian currency is strong or weak.
The falling value of the Rupee affects Common People: When the rupee becomes cheaper against the dollar, it has a direct impact on the economy.
The falling value of the rupee brings inflation. Rising prices could accelerate inflation, which is already high. In such a situation, everything from the life of the common man to businessmen and government will be affected by the value of the rupee. The decline in global activity, investors' decision to invest money in safe global markets and increasing tension in global politics are among the main reasons behind the fall of the rupee. Even if we do not take seriously the fall and rise of a few paise in the rupee, they have a big impact on our lives.
The fall in the rupee has a direct impact on the country's economy, due to which import of petroleum products will become expensive and freight transportation will become expensive. This will have a direct impact on the inflation of every essential item. There is a sudden increase in all loans taken in foreign currency and the interest paid on them. Studying abroad will also be expensive.
Why the Rupee is falling: The value of the rupee completely depends on its demand and supply and import and export also have a direct impact. A country that imports more than it exports has a higher demand for dollars. Like India imports more than it exports. India is one of the major importers of crude oil and imports about 80 per cent of the oil, undoubtedly the rising prices of crude oil in the international market are the main reason for the fall in the value of the rupee.Things to do for the value of the Rupee: Although the Central Government has assured to make every possible effort to stop the fall of the Rupee, now the Government will have to take concrete and tough steps. If the government tries to change its economy dependent on oil, then we can save a huge part of the foreign reserves and for this, we all should consider alternatives to oil. There is a need to pay attention to electric vehicles. Effective steps will have to be taken to stop the fall in the value of the rupee and keep the foreign exchange reserves rich.
Government Steps: The government is indeed striving to create a competitive, dynamic environment to provide sustained economic growth and enhance its relevance in international trade, PM Gati Shakti, National Single Window Clearance, GIS-mapped Land Bank, Production-Linked Incentive (PLI) etc. The manufacturing sector is expected to benefit from the implementation of recent policies like the PLI scheme. Its results are also visible in some areas, the development of coronavirus vaccines by Indian companies is a vivid example of indigenous talent. India has rapidly made its place in the Ease of Doing Business index released by the World Bank. India's EDB rank was 134th in the year 2014, whereas in the year 2023, it has become 63rd. India is ranked 40th in the Global Competitiveness Report Index published by the Geneva-based World Economic Forum, where it was ranked 60th in 2014. But all these reforms in the ranks have also failed to revive the manufacturing sector and provide the desired support to the Make in India campaign.
Big Time for Make in India: The government will have to move strategically towards controlling imports and increasing exports. This is the time to effectively implement the 'Make in India' program which even after nine years is far behind in its effective contribution. Despite being the fifth largest economy, India contributes barely 1.6% to world exports. A primary objective of the campaign was to increase the share of the manufacturing sector in the Indian GDP to 25 per cent by 2022 although it has remained between 14 to 16 per cent in the last 9 years.
During the coronavirus pandemic, there was publicity that the companies leaving China were going to come to India, however, most of these companies have shifted their base to Vietnam, Taiwan, Thailand etc. and only a few have come to India. Every year crores of laptops, desktops and servers are sold in India, in which motherboards memory models and chips are being imported. We are dependent on other countries for these components.
Even today, most of the items are not being produced but are being assembled. There is no justification for the import of Harmonized System products (HS-84, nuclear reactors, boilers, mechanical equipment and their parts), and HS-85 (electrical machinery) as most of these items can be produced locally. PLI schemes should be extended to MSMEs and emerging industries to increase exports.
The 15 per cent corporate tax rate for new investment in manufacturing should be extended to all industries including the service sector. The expansion and use of new-age technology applications such as Artificial Intelligence (AI), Internet of Things (IoT) and Machine Learning (ML) require tax incentives on capital or operational expenditure. The government should reduce the logistics cost to 6-8% of the GDP which is currently 14%, the good thing is that recently at the G-20 summit, there has been talk of setting up an economic corridor at the international level.
The manufacturing industry in India remains flawed due to the poor infrastructure of the country. Compared to China, which spends 20% of its GDP on infrastructure development, our country spends only 3%.Way Forward: At a time when the value of the rupee has crossed Rs 84 per US dollar, the role of 'Make in India' becomes very important. According to the International Labor Organization (ILO), India may face a shortage of about 29 million skilled workers by 2030. The economy needs more than policy window dressing to increase manufacturing activity. We need to understand that just passing bills and organizing investor conferences will not be enough to promote industrialization.
The manufacturing sector is constrained by large amounts of paperwork, be it labour, land or environmental clearances, stringent regulations and policy. Taxation and customs policies are complex to such an extent that it is cheaper to import things like medical equipment rather than manufacture the equipment domestically. India can make itself the next 'global factory' in the future, which is already fed up with China and is looking for alternative manufacturing hubs. There is a need to free the manufacturing sector from cumbersome rules.
Certainly, the fall of the rupee against the dollar can be controlled through such effective steps. Also, if we start using indigenous goods then the cost of importing foreign goods will be saved. For India to become a $5 trillion economy by 2025, we need to export at least $2.5 trillion worth of goods and services, as exports currently contribute about 25% to the total gross domestic product (GDP). India has no time to rest. We have come a long way, but the journey is not over yet.
(The writer is an associate professor at JNU, New Delhi; views are personal)
