Wednesday, March 17, 2010

The purpose of Exports - Part IV

Suppose that India exports USD 1 bln of goods and imports USD 1.1 bln. If the exchange rate is, say Rs. 40/USD, then the trade gap of USD 100 mln translates to Rs. 400 crs. But if the exchange rate is Rs. 50/USD, then the same trade gap of USD 100 mln costs us Rs. 500 crs.
This doesn't take into account the loss of purchasing power, of the economy as a whole and of its citizens in particular. The domestic price of almost all commodities in India are linked to their international prices with some lag, or adjustment. Since this linkage requires a currency conversion, the INR exchange rate becomes an important input for the domestic price. So if International price of Crude Oil is USD 100/ barrel and INR exchange rate is Rs. 40/USD, a barrel of oil would cost Rs. 4,000. Even if the price of oil remains stable, but the INR depreciates to Rs. 50/USD, the same barrel of oil would cost Rs. 5,000 in India. So while US citizens continue to enjoy stable oil prices, the Indian consumer has to pay 25% higher for the same goods.
This is the reason why the cost of Petrol in India has risen inexorably through the years. Some facts that make it apparent are given below.
In 1972, Petrol cost Rs. 1.73/litre in India and the international price of crude oil was USD 10/ barrel. Now, Petrol costs close to Rs. 50/ litre in India and the international price of crude oil is USD 60/ barrel. So while consumers in the US pay 6 times the 1972 price, consumers in India pay 29 times the 1972 price.
The same would hold true for most raw materials which are quoted internationally. And consequently, for the finished goods that all of us consume. And this is precisely why we cannot afford to buy the best quality domestic produce as well. The international consumer, where currencies have remained strong and stable, is able to pay a much higher price for this produce than the Indian consumer can afford.
In conclusion, a weak currency hurts the purpose of exports while benefiting exports themselves. A weak currency also impoverishes the citizens, making them pay more for the same produce, reducing their standard of living. Whether a country like india, where poverty is still rife, can afford this additional impoverishment is a question for each of us to answer for ourselves.


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