Fat & Thin

Today's newsletter is about USD($) and INR(₹) . . .

Sep 13, 2020

Hey fellas! Hope you’re doing well..

Btw, are you overstuffed with all of SSR, Rhea, Kangana, China, bla bla bla ?

Well, here I am, to your rescue :)

Fat or thin? What are you? Hmm? Tell me, does it matter? A weighs 50 Kg, B weighs 100 Kg, does it make B twice as powerful as A? Or does it make A twice as fast as B? Nah. There are wrestlers like Spike Dudley who, in spite of their light weight, proved to be heavy on the opponents. Usain Bolt, the fastest runner, for example, weighs 95 Kg, 15 more than the ideal weight, is it even an issue? Ergo, it isn’t right to body-shame others! By the same token, you can’t judge figures and numbers by ignoring the underlying. True it is for $ and ₹.

lol ;-)

Today I’ll try to simplify the fuss around currency and foreign exchange, so that next time there is a dinner-table talk.. you go there and nail it ;-)

Okay, tell me honestly.. how would you feel if you get a 7-nights tour to US for just ₹1250 ? Or have a Levis 501 jeans for ₹178, flaunt an iPhone XS Max with just over ₹1450 ? Or go on a long ride with your beloved in your Porsche worth ₹50,000 ? Cool stuff, isn’t it? But that’s only when $1=₹1. Well, it’s not impossible, but it’s highly unlikely. Cause things aren’t so hunky-dory. And better so. By the end of this piece, I hope you’ll be convinced.

Well, before talking about the ‘utopia’ we just dreamt of, it’s good to have a reality check. As of today, $1 = ₹73.48 ; that just means if you think dollar as a commodity, you’ll need to pay ₹73.48 to buy a dollar on the spot. But this wasn’t always the case.

As you can see, back then, post-independence, a dollar would cost ~ ₹4. Fast forward 73 years, and a dollar is now ~18 times as costly as it was then! Well, then what led us here? Why this inferiority complex? Why not set rupee equal to dollar? And oh, who sets it btw? Hold on guys, it’s on me, I’ll put it in an easy-to-digest manner.

(Don't you hate it when someone answers their own questions? I do.)

$1 = ₹1

For all of you who think it is impossible.. well, it isn’t. Any day, the Government of India and RBI could have a crack and come up with a new currency called ‘X’ and set its value as ₹74; i.e. equal to the mighty dollar. And then, replace ₹ with X. Woah, time to pursue the American dream, is it? But what good it be to you? Does it make any difference? Nah, the underlying is still the same! We’ll still fall behind the dollar. No, it’s not the face value, it’s the underlying productivity. It’s the growth potential.

1 Mile is approximately equal to 1.61 Km. India uses Km as a unit of measurement whereas in US, it’s Miles. Does it make any difference whether you walk 1 Mile in US or 1.61 Km in India? Hmm? No, it doesn’t. You know what matters? May be the American traveled on a well-laid road whereas the Indian had to struggle through a narrow traffic-bugged route! That’s it, after all, the productivity and the standard of living. See, even if we adopt dollar as our currency (that’s also an option), we might not enjoy the same luxury as an American does because there are differences in income, in standard of life, in everything.

There is this fundamental narrative fallacy that stronger currency makes a better economy. By that logic, Bangladesh should be economically better than Japan, simply because 1 Bangladeshi Taka = 1.25 Japanese Yen? Well, that’s an irony! Take currency simply as a unit of measurement and everything is sorted. Economic growth is an outcome of a number of complex mechanisms, ergo never judge a book by its cover.

Anyways, suppose we get it done somehow. Let’s see the implications in these hypothetical situations.. (ignoring forward rates, hedging and other mechanisms for simplification)

Think exports — say a Mr. Raj, an Indian manufacturer of stationery, spends ₹500 to manufacture 100 pens. He exports his entire produce (100 pens) to Mr.Mark in US and receives $10. Earlier when $1=₹74, he would realise ₹740 (=$10 * ₹74 per dollar), thus making a profit of ₹240 (=740-500). But now, situation has changed (hypothetically).. suppose the value of ₹ increases and now, $1=₹37. Mark still pays $10 for 100 pens. After all, Mark is a rational guy, he doesn’t care what the hell happens in India, well why should he? If Raj doesn’t provide him pens at the determined rate, he has other suppliers as well! Then why would Mark be willing to pay more just because ₹ appreciated? No, he won’t. See the agony of Mr. Raj.. now he will receive the same $10 for 100 pens, but now that is worth only ₹370 (=$10 * ₹37 per dollar). Thus, he has to bear the loss of ₹130 (=500-370)! In a similar tone, you can see that now domestic products become more expensive than foreign products. Ergo, the demand for domestic goods declines in the international market, which in turn, reduces the net exports and ultimately, the output!

Think employment — suppose you are an Indian software engineer employed by a US company for a monthly salary of ₹74000. This might be equivalent to a US guy earning $1000 per month (as $1=₹74). So far, so good. Now as per our hypothetical situation, if $1=₹1, think what happens.. obviously the company will now pay you $1000 and that isn’t lucrative anymore, as that’s worth only ₹1000! Or may be now, India would no longer be a source of cheap labour and hence, many jobs will be shacked!

Think overall — on your income, a family depends, your child’s school depends, your family doctor depends, your go-to restaurant depends, a bank depends and so forth, there’s a ripple effect.. the outcome of incidents mentioned in previous paras will be that jobs will be lost, income sources gone, businesses devastated, EMI defaults, bankruptcies, insolvencies and the whole economy will be in turmoil! And then, the RBI will have no other option but apply various measures to devalue the currency! So, there you are back to where all of this started.

See.. dollar is unparalleled! That’s mighty, the greenback. Countries import oil, gold and a host of articles by paying in dollars. So, it’s not feasible to equate dollar, especially for a developing economy like India. That’s why RBI is very careful not to let ₹ get too strong. Because that’s to India’s advantage. It keeps exports high, wages high and imports low.

As a someone puts it -

Change is good but dollars are better ;-)

Here’s a Bar Race Chart that I have prepared using Flourish.studio and Investing.com that shows how various popularly traded currencies performed against Rupee in the past 30 years.

Well then, what should be done? Should we let it be as it is? No way man! Then what? Oh, some nationalists point out we should go for domestic products ‘entirely’! No. Being atmanirbhar is great, but too much of atmanirbharta can hamper foreign investments in India, which is the need of the hour. Being self-reliant is one thing, whereas self-sufficiency is something else, they shouldn’t be confused. We need to be self-reliant and not the later. Okay, then what? Why do you think in spite of being close to a dollar or a pound in 1947-48, we’re here? That’s because we, as a nation, had higher inflation and lower productivity in comparison to US, UK, etc. Then, should we control inflation? Well, we already have so many measures in place to do that. Then tell me no, what has to be done? Umm.. we need to improve our productivity. If every Indian guy making ₹74000 p.m. is able to produce 74 times more output than a US guy making $1000 p.m. — then my friend, feel proud as punch.. we are at par with dollar. No only that, our nation can be wealthier and economically strong if we find and (more importantly ‘implement’) an answer to this question - how to get an average Indian to become much more productive than a non-Indian? And I leave the question for your intellectual thoughts..

So, that’s it, the buzzword for today — ‘productivity’.

Well, in the following document, I have tried to explain the Forex mechanism in simple words. Read on if you’re interested. It’s up to you..

So, that’s it guys. Now that you’re done reading, perhaps you’d think twice before claiming why not $1=₹1. Whenever such a discussion arises in the future, put forth these points and help make it a constructive one. Let’s research, analyse things, question our intuition and only then, pronounce a decision. That’s the first and an integral step towards what we want to achieve — ‘productivity’.

If you liked this article, if you know someone who keeps blaming the Government and the RBI for rupee depreciation, do share this article with them and things will make sense.

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