According to economic theory, the currency of a country becomes costlier, i.e., it increases as compared to the currencies of other nations, in accordance with a rise in the level of its productivity as compared to the productivity level in other country. This primarily has its basis in varied goods and services which can be traded at an international level; such goods and services can be cars and call centers, etc., but not hair-cuts.
The price of a hair cut can increase in a faster rate, than the price of an automobile, because the barber cannot increase his productivity, the way an automobile company can, by means of automation. This is the reason for haircuts being more expensive in countries with higher wages such as the UK as compared to a low-wage country like India.
Besides productivity, the rise and fall in currencies are also dependent on varied other factors such as resource inputs, relative rates of inflation, and the attraction of an economy to foreign investments. If a country’s capital is going out and not coming in, or if the rate of inflation is high, or if the trade deficit is big, then the currency of that country will drop and lose value.
It can thus be said that an economy that is well-managed generally encompasses a currency that is adding value and strength, while the opposite occurs in badly-managed economies. For example, in the past 10 years the currencies with the worst overall performance are from those countries that are in financial crisis, such as Turkey, Argentina, and Russia. The currency of Brazil has also not performed well in the past decade.
From the above viewpoint, we need to verify whether the Indian Rupee (INR) has been doing well or not. It can be safe to say that the INR has not been doing that well relative to the Asian markets context.
Over the past 10 years, there has not been much change in the value of the INR as compared to the Pakistani rupee or the currency of Sri Lanka. However, the INR has seen a significant drop in its value when compared against other key Asian currencies such as China and Bangladesh. It may be noted that 1 Bangladeshi taka was equal to 68 paise in 2008, but now it is equal to 85 paise. Over the past decade, the INR has also lost its value as compared to other Asian currencies such as the Malaysian ringgit, the Philippine peso, the Thai baht, and even the Vietnamese dong.
It may be noted that the decline in the INR relative to other major Asian currencies would have been lesser if the recent dive in the INR was not taken into account. However, even if the recent loss of value was not considered the decline in the INR over the past 10 years would still be evident.
As compared to a developed economy, an emerging market has a better scope for increases in its productivity, typically due to the probability of catching-up to the developed economy. Hence, the currency of a well-managed emerging market should as a rule not just gain against other emerging countries but also against economies of developed nations.
This is the reason why the Thai ((Thailand is an emerging economy) baht over the past decade has seen a significant increase in value against not just the INR but also against the Euro and the US dollar. Also, the Chinese Yuan has not kept its own and not withered against the strong US dollar. The Philippine peso has gained value against the Euro, while the ringgit has not lost value against the European currency. As opposed to the above, the INR has lost considerable value against both the US dollar and the Euro.
It is a known fact that barring China the Indian economy is growing at a faster pace as compared to all the above mentioned Asian nations. Then, why is the INR losing ground against the key Asian currencies?
Economists have stated that one of the reasons for the decline of the INR is that most of the agricultural and manufacturing goods that can be internationally traded have been performing poorly. Another argument is that the growth of an economy occurs due to varied factors, including growth in population, and that may not necessarily indicate consequent increase in ‘factor’ productivity.
It is a known fact that nearly 50 percent of the workforce in India continues to be in one of the least productive jobs, i.e., agriculture or farming. The income in farming is around 1/6th of the incomes associated with non-agricultural activities. Additionally, a large chunk of the exports from India continue to arise from industries with the key advantage of low cost of labor, such as garments and diamond cutting sectors. As opposed to this, China has made a shift from garments and toys to other economic activities with higher incomes such as manufacture of specialty goods and robots.
It is safe to say that besides agriculture the current stage of development in India primarily consists of activities that are more labor-intensive so as to absorb the excess labor from farming. Nearly all of the shift of labor from agriculture to non-farming sectors such as tourism or construction will result in increases in productivity. The real test of whether or not such movement of labor to different sectors is occurring at an appropriate pace will be seen in the performance of the INR over the next few years.