Re has appreciated less than yuan

leave the economists behind; its the populist who decides the numbers....I was badly looking for someone to come out with some good analysis on this and who else other Aiyar would!
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9 Dec, 2007, 0230 hrs IST,Swaminathan S Anklesaria Aiyar, TNN

Hundreds of columns have been written on the exchange rate policy of the Reserve Bank of India, and its decision to let the rupee appreciate sharply this spring. However, what was earlier a debate mainly between technocrats has suddenly assumed populist, alarmist tones.

In Parliament, commerce minister Kamal Nath has said the appreciating rupee has hit labour-intensive exports such as textiles, leather goods and gems & jewellery, and that one to two million workers may have lost their jobs. Following up, industrialist and Rajya Sabha member Rahul Bajaj has written in this newspaper suggesting that 2.8 million people have lost their jobs.

The numbers are so huge that, if they were anywhere near the truth, we would have a major human tragedy on our hands. In fact, we have only tall stories and data inflation aimed at scaring people rather than informing them.

I toured Gujarat in the run-up to the state election, and talked to a wide range of people about the many issues that might determine the outcome. Not a single person mentioned worker distress in export industries as an election issue. Nor did I see this mentioned in the innumerable TV discussions of the Gujarat elections.

Now, at election time opposition parties are given to exaggerating rather than hiding distress issues. Narendra Modi was fighting principally on an economic development platform, and Congress speakers were looking desperately for flaws in his platform. Gujarat is a major centre for exporting both textiles and gems. If indeed workers were being thrown out of work by a strong rupee, this would have been a huge election issue. In fact, it was a non-issue.

I myself toured Ahmedabad and Saurashtra. I can state categorically that the garment and textile areas there were not hit by mass unemployment. Indeed, at least one textile magnate, Vinod Arora of Aarvee Denims, was positively gung-ho about the future of his industry.

I did not visit the diamond-cutting areas around Surat. But my Economic Times colleagues went there, and found no unemployment arising out of a strong rupee. They found signs of declining foreign orders, but this had not translated into fears of job losses among diamond cutters. The electoral impact was negligible. In which case the economic impact must be close to zero too. Proponents of a weak rupee are altogether more agitated than the people on whose behalf they claim to be agitating.

Now, ET correspondents have reported job losses running into thousands in Tiruppur. Clearly, there is some distress in some areas. But it is not an all-India calamity. There is a world of difference between losing a few thousand jobs and two million. Some job losses are inevitable, indeed desirable, in a market economy, and constitute transitional pains, not human disaster. Those who claim that a strong rupee is costing millions of jobs are talking through their hats. We need to shout this from the rooftops, since many media folk are falling for false propaganda on this score.

Indeed, the notion that modest changes in the exchange rate can produce such huge swings in employment is obviously false. If a modest rise in the rupee can kill two million jobs, a corresponding fall in the rupee should create a similar number of jobs. Alas, that did not happen when India had big currency declines in the past. Nor will it happen if the rupee now falls by 13%.

Export growth in April-September was 26.9% in dollar terms, and provisional data suggest 35.6% growth in October. Even allowing for rupee appreciation of 13%, this constitutes solid export growth. Exporters may be under somewhat more pressure than before, but are not throwing millions out of work.

What exchange rate policy should we have? I have written much less on this topic than many other observers, because I do not have strong views on the subject. I see some substance in the position of those who say the RBI should focus only or mainly on inflation control, letting the exchange rate find its own level. I also see some substance in those who think the RBI should focus on macroeconomic management over and above inflation. Finally, I see some substance in the argument of those who want the RBI to focus on the exchange rate above all, to promote exports and employment.

Most people measure the rupee’s strength against the US dollar. The RBI is more sophisticated: since 1973 it has aimed to keep constant the real effective exchange rate, to protect exporters after accounting for changes in the nominal exchange rate and inflation. Many technocrats see this as a successful policy worth maintaining. Others point to China as a superior example of a country that has refused to kow-tow to foreign pressure to appreciate.

However, the notion that the rupee has appreciated much faster than its rivals does not stand up to detailed examination. Certainly the 13% appreciation of the rupee since early 2007 is steeper than experienced by most rival currencies. But if we start our comparison in July 2005, when China first began to let its currency rise, we find that the rupee has actually risen less than the yuan!

See the accompanying table. It shows that, compared with July 2005, the rupee has risen only 9.4% against the dollar. Much stronger rises have been registered by China (10.9%), South Korea (11.1%), Malaysia (12.6%), Thailand (20.2% and Brazil (25.4%). In no way can the rupee’s appreciation be called steep or extraordinary.

So, what’s the fuss about? The answer lies in the fact that the rupee actually weakened against the dollar from mid-2005 to mid-2006, at a time when other Asian currencies were strengthening. This has now been reversed in 2007, somewhat sharply. Had the RBI allowed rupee appreciation from 2005 onward in line with China, the change in 2007 would not have been so sudden.

Seen in this light, the main failing of the RBI is not that it has made the rupee too strong, but that it should have started the process two years earlier. Had it done so, the change in the rupee’s value would have been more gradual and corporations would have adjusted much more smoothly.

The RBI’s second failing is that inflation in India has been higher than in most rival countries. This erodes our competitive edge. Whether rising productivity offsets this remains to be seen.

------------------ more to add onto Aiyar is that rising rupee also helps in controlling import prices. Given that many Indian textile manufacturers are expanding, this is the time to import those expensive machines. And yes go on the M & A rampage. Leave alone capital expenditure, think about the good effect it has in acting against the rising crude oil prices. All I want to say is that 'every coin has two sides'! -Vj

Swaminomics: India: Bad marks, yet Ist division

Even as Mukesh Ambani is reported (probably inaccurately) to have become the richest man in the world, the World Hunger Index of IFPRI has ranked India 94th out of 118 countries, just above Ethiopia and worse than any country in the subcontinent save Bangladesh. The contrast between rich and poor is stark.

India's social record has long been bad. It ranks a lowly 126th in the Human Development Index of the UN. World Bank data show that India has among the highest rates of child malnutrition and maternal mortality in the world.

Predictably, the left says that India's neo-liberal economic policies fatten the rich and neglect the hungry. But that is comically wrong. India fares very poorly in global indices of economic liberalisation, no less than of human development. It is not the case that India is world class in economic reforms but poor in social reform. Rather, India gets terrible scores on pretty well everything.

Leftists claim that India's neo-liberal policies have lifted almost all controls. Really? How could our esteemed netas and babus extract bribes ad nauseum if there were no controls and permits? The Corruption Perception Index of Transparency International ranks India a lowly 72nd, below many African countries.

A survey of the Centre for Media Studies shows that 80% of all Indians pay petty bribes totaling a whopping $4.8 billion for services they are entitled to. A quarter of the bribes are for admission into supposedly free schools and hospitals. So if the poor are deprived, blame not the Ambanis or Narayana Murthys but the neta-babu raj, which remains intact and venal as ever despite some limited liberalisation.

Is bribery just a small wart on a healthy liberalised system? Hardly. India ranks only 104th in the Index of Economic Freedom, published annually by the Heritage Foundation and Wall Street Journal. In economic freedom, no less than in corruption or hunger, India ranks well behind several African countries.

The Index of Economic Freedom rates India as mostly unfree. India ranks below the world average on six out of 10 criteria. It gets overall marks of 56%. Its marks are much worse in regard to corruption (29%). It gets only 30% marks for financial freedom — government banks still dominate 70% of banking, stringent licensing prevents new Indian and foreign players from entering this sector, and two-fifths of bank loans have to be given to sectors decreed by the government. India gets 40% marks for investment freedom — foreign investment is still restricted or banned in a number of sectors, capital controls limit rupee convertibility, and NRIs and foreigners face several restrictions on investing in India.

The World Bank's annual series on Doing Business ranks countries on the ease of doing business. In the latest report, India ranks just 120th out of 180 countries. It is the worst in South Asia: better are Maldives (60th), Pakistan (76th), Bangladesh (107th) and even Maoist-hit Nepal (111st). China (83rd) is better than India but worse than Pakistan, highlighting the fact that red tape still inhibits some of the most fast-growing economies.
Among the various doing business indicators, India is virtually at the bottom in enforcement of contracts (177th). This means, in effect, that contracts are pretty meaningless, the rule of law does not prevail, and property rights are insecure.

Almost as bad is India's performance in demanding payment of multiple taxes (165th out of 180 countries). On the ease of hiring and firing workers, it ranks 85th, which is poor but actually much better than India's scores on some other criteria. It seems that businessmen can find ways round inflexible labour laws. India scores badly in ease of opening a business (111th) and even worse in closing a business (137th).

India fares badly on several policy and governance indicators. Its fiscal deficit remains over 6% of GDP, which is a crisis level in most countries historically. Subsidies are still 14% of GDP, of which half are non-merit subsidies without redeeming social virtues. The quality of public services is pathetic. Legal delays make a mockery of justice. Legislatures and cabinets are full of criminals. And Maoist violence affects 157 of our 600 districts. Despite scoring so poorly on economic, social and governance indicators, India nevertheless boasts record 9% economic growth. It boasts some social successes too. Life expectancy has increased from 31 years at independence to 64 in 2005, a huge jump.

NSSO surveys show that people saying they don't get enough to eat for part or all of the year have fallen from around 15% of the population in 1983 to 5.5% in rural and 1.9% in urban areas in 1994-94, and to just 2.6% in rural and 0.6% in urban areas in 2004-05. IFPRI may rank Indians as very hungry, but Indians themselves say that hunger has largely ended.

Not all international indicators are as off-target as IFPRIs. Many seem accurate. This deepens the mystery of how India is succeeding despite horrible flaws in dozens of areas. It is like a student who gets poor marks in most papers, yet ends up with a first division.

http://timesofindia.indiatimes.com/Opinion/S_A_Aiyar_India_Bad_marks_yet_Ist_division/articleshow/2515950.cms