Rupee at 80: The Indian tradition of political involvement in exchange rate

Despite the Sangh Parivar's belief that a strong rupee is good, the govt has seen the wisdom of letting it depreciate gradually

One dollar is now nearly worth Rs 80. The Opposition is having great fun because Prime Minister Narendra Modi had promised a much stronger rupee when he was campaigning in 2013 and 2014.

Others, who are very learned in these matters, commented on this website yesterday on the 80/dollar thing. So here, let me recall a very old debate on it. It happened between 1927 and 1939. The difference is that whereas then it was only about economics, now it’s all about politics.

In those far-off days, London’s monetary policies had restricted the supply of currency and credit, depressing Indian growth.

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That’s why Indian GDP saw a trend growth rate of 0.93 per cent per year from 1900 to 1947, even though the world economy had boomed for more than half this period. India hadn’t benefitted at all from these booms.

That’s why C D Deshmukh, the first Indian governor of the Reserve Bank, had said: ‘The students of the economic history of those times (i.e., the 1920s and the 1930s) will always regret the delay that took place in the establishment of the Reserve Bank of India. Had it come into existence earlier, the government might have spared India the action in the field of currency and exchange which proved injurious to India’s interests.’

The origins of this problem can be traced back to the British fixing of the rupee’s exchange rate since the 1870s. Thus in 1927, they changed it to 1s.6d per rupee from 1s.4d. 

This new rate did three things. It helped British exports to India and inhibited Indian exports. It facilitated the transfer of the so-called “Home Charges”, the fancy name the British gave to the practice of making India pay for the privilege of being exploited by them. And finally, it inflated the value of the debt owed by India to British banks. There was, therefore, a massive outflow of gold from India to Britain.  Indians protested to no avail.

Purshottamdas Thakurdas, a highly influential Indian businessman and founder of FICCI, wanted the old rate back. He said the Indian cotton textile industry was depressed because of the overvalued rupee. He felt that the currency authority would deplete India’s gold alarmingly if the exchange ratio was maintained at this rate.

Businessmen and many economists supported his view. But it was refuted by Dr B R Ambedkar, among others. “Without increasing the volume of currency,” he wrote, “we cannot certainly reach 1s.4d in gold.” He was right because the British weren’t going to do that.

Even Sir George Schuster, the new finance member of the Viceroy’s Council, was convinced that it would be best to go back to 1s.4d. He called the higher ratio his ‘…worst inheritance(s) and appeared to him indefensible’. 

In 1938, the Congress Working Committee asked the provincial Congress ministries to agitate for a lower rate. It was ignored by the British.

I have narrated this debate — albeit briefly — because India has a long tradition of political involvement in the exchange rate. The result has been an exchange rate obstinacy of a kind not seen in other countries. 

That’s why it is only when things have reached rock bottom, as in 1966 and 1991, that the crisis has led to sensible exchange rate policies.

On both occasions, the rupee was devalued in a jump, thus giving the economy a huge and avoidable shock. Despite Sangh Parivar’s belief that a strong rupee is good, this government has seen the wisdom of letting the rupee depreciate gradually.

By the way, given inflation, it still has some way to go. I’d say about Rs 85 to the dollar. The only issue is by when.