01-29-2005, 07:48 AM
THE RISING RUPEE
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->India Should Not Fritter Away The Golden Opportunity
By BHARAT JHUNJHUNWALA
The price of the rupee has risen from Rs 49 per dollar about a year ago to Rs 44 per dollar presently. It is expected that this upward movement will continue. Ours is fast becoming the worldâs No 1 economy. Scientists, engineers, doctors and architects are available aplenty in our country at relatively low wage rates. These technocrats are absorbing the frontline technologies of the Western countries speedily. Nay, they are often creating those technologies. Simultaneously, our businessmen have braced up to face global competition. We have got the winning combination of entrepreneurship and cheap labour. Our exports in business process outsourcing, software, gem and jewelry, garments, etc are dominating the world market.
Share markets
Foreign investors have noted this success. They are investing large amounts in our share markets. They expect our companies to make huge profits in the near future. They have to buy rupees in large quantities to make these investments. This is leading to higher demand for the rupee hence the increase in its price.
Another reason is the large amounts of remittances being sent by the NRIs. Our mothers produced large number of children for export! Nehru established the IITs and provided them with scientific education. Our NRIs are in demand across the world. The three reasons for the rise of the rupee are exports, foreign investment and remittances.
Will this rise be stable or short-lived? Other countries have not been able to make similar fortunes permanent. Germany was the star performer in the sixties. The German companies like Siemens and Mercedes Benz were dominating the world market and the Mark was rising. Japan had a similar situation in the seventies and eighties. The price of Yen increased from 350 per dollar to 80. A similar situation prevailed in the nineties in the United States. The dollar rose against the Euro, Yen and other currencies. But the dollar has started declining in this decade.
Everyone worships the rising sun. The investors pumped in money into these economies at these times. But these countries were not able to maintain their excellence and soon they had to vacate the top place. Now it is the turn of India. Foreign investors have turned toward the rupee. Will we be able to make this rise permanent or slide like Germany, Japan and the US after a few years?
These countries lost their balance at the time of rise and frittered away their wealth. Germany used the income to establish a heavy welfare state. The government made strict labour laws relating to minimum wages, hours of work, health benefits, etc. High level of tax was imposed on the companies to provide unemployment compensation, health care and housing to the people. As a result, the price of labour rose and German companies did not have enough surpluses to invest and they lost in global competition.
Bonhomie
Japanâs decline came in a different way. There was a cosy relationship between the government and the business in that country as if their finance minister was being run by the large companies. This bonhomie produced excellent results initially. Enamoured by their success, they made irresponsible investments and incurred heavy losses. The regulatory function of the government suffered and the companies were unable to maintain prudent financial behaviour for long. But the government continued to encourage the banks to give them huge loans. The companies became hollow inside. Ultimately, the balloon burst and new loans stopped pouring into the companies. Japanese companies lost their competitiveness in the global market.
The US has been the centre of technological innovations of the last century. Motor car, nuclear power, jet airplane, computer and the internet are all gifts of that great country. Hard working American scientists produces these wonderful innovations. America is the land of the risk-takers who left their European homeland to seek a new life in an unknown country. They were determined to become rich. They became rich. But soon they became easy-going. They were not able to maintain a balance in success. The IQ of American children is low nowadays. American applicants are unable to compete with Indians for jobs in America. The generation of new technologies in the US is slowing down. Research is increasingly being outsourced to India. As a result, the No 1 position of the US companies is under pressure. Investors are losing confidence and the dollar is declining.
The challenge before us is not to make the mistakes made by these great countries and to make the rise of the rupee stable and permanent. We have to use the capital inflows prudently. It appears, however, that the Manmohan Singh government is implementing those very policies that led to the decline of Germany, Japan and the US.
The government has started imposing higher taxes on the companies to support a bloated welfare state. Government expenditure on education is being raised despite the poor results of these schools. The Employment Guarantee Scheme is being made despite few durable assets being made in other similar schemes.
We are creating a welfare state like Germany. The correct policy is to provide relief in taxes to labour-intensive industries and impose high taxes on capital intensive one. Such cross-subsidisation will lead to generation of jobs and there will remain no need to support a bloated government welfare bureaucracy.
Two pillars
The government has appointed Ratan Tata chairman of the Investment Commission. Indeed, it is heartening that the government is reposing faith in our industrialists. But there is a difference between honouring the businessman and handling over the reins of the government to them. Friction between these two pillars of society is the best policy. Japan had eliminated this friction leading to decline of its businesses. The government is repeating this mistake.
The US used the capital inflows not to invest but to import goods from across the world for consumption. The current trade deficit â excess of import over exports â is in the excess of $500 billion per year. This is being financed by capital inflows. Borrowed money is being used to provide consumption goods to the American people. Not hard work, but ostentatious consumption is being held as the desired role model. No wonder the American people are losing out in competition. Our government is following a similar policy. It is trying to attract all types of foreign investment irrespective of its impact on our society. It should instead make a social audit of all domestic and foreign investment.
The rupee is rising. World capital is turning towards India. We should not fritter away this golden opportunity by making the mistakes made by others. We should use this capital in the right way so that we are able to maintain ourselves as No 1 economy in perpetuity. <!--QuoteEnd--><!--QuoteEEnd-->
<!--QuoteBegin-->QUOTE<!--QuoteEBegin-->India Should Not Fritter Away The Golden Opportunity
By BHARAT JHUNJHUNWALA
The price of the rupee has risen from Rs 49 per dollar about a year ago to Rs 44 per dollar presently. It is expected that this upward movement will continue. Ours is fast becoming the worldâs No 1 economy. Scientists, engineers, doctors and architects are available aplenty in our country at relatively low wage rates. These technocrats are absorbing the frontline technologies of the Western countries speedily. Nay, they are often creating those technologies. Simultaneously, our businessmen have braced up to face global competition. We have got the winning combination of entrepreneurship and cheap labour. Our exports in business process outsourcing, software, gem and jewelry, garments, etc are dominating the world market.
Share markets
Foreign investors have noted this success. They are investing large amounts in our share markets. They expect our companies to make huge profits in the near future. They have to buy rupees in large quantities to make these investments. This is leading to higher demand for the rupee hence the increase in its price.
Another reason is the large amounts of remittances being sent by the NRIs. Our mothers produced large number of children for export! Nehru established the IITs and provided them with scientific education. Our NRIs are in demand across the world. The three reasons for the rise of the rupee are exports, foreign investment and remittances.
Will this rise be stable or short-lived? Other countries have not been able to make similar fortunes permanent. Germany was the star performer in the sixties. The German companies like Siemens and Mercedes Benz were dominating the world market and the Mark was rising. Japan had a similar situation in the seventies and eighties. The price of Yen increased from 350 per dollar to 80. A similar situation prevailed in the nineties in the United States. The dollar rose against the Euro, Yen and other currencies. But the dollar has started declining in this decade.
Everyone worships the rising sun. The investors pumped in money into these economies at these times. But these countries were not able to maintain their excellence and soon they had to vacate the top place. Now it is the turn of India. Foreign investors have turned toward the rupee. Will we be able to make this rise permanent or slide like Germany, Japan and the US after a few years?
These countries lost their balance at the time of rise and frittered away their wealth. Germany used the income to establish a heavy welfare state. The government made strict labour laws relating to minimum wages, hours of work, health benefits, etc. High level of tax was imposed on the companies to provide unemployment compensation, health care and housing to the people. As a result, the price of labour rose and German companies did not have enough surpluses to invest and they lost in global competition.
Bonhomie
Japanâs decline came in a different way. There was a cosy relationship between the government and the business in that country as if their finance minister was being run by the large companies. This bonhomie produced excellent results initially. Enamoured by their success, they made irresponsible investments and incurred heavy losses. The regulatory function of the government suffered and the companies were unable to maintain prudent financial behaviour for long. But the government continued to encourage the banks to give them huge loans. The companies became hollow inside. Ultimately, the balloon burst and new loans stopped pouring into the companies. Japanese companies lost their competitiveness in the global market.
The US has been the centre of technological innovations of the last century. Motor car, nuclear power, jet airplane, computer and the internet are all gifts of that great country. Hard working American scientists produces these wonderful innovations. America is the land of the risk-takers who left their European homeland to seek a new life in an unknown country. They were determined to become rich. They became rich. But soon they became easy-going. They were not able to maintain a balance in success. The IQ of American children is low nowadays. American applicants are unable to compete with Indians for jobs in America. The generation of new technologies in the US is slowing down. Research is increasingly being outsourced to India. As a result, the No 1 position of the US companies is under pressure. Investors are losing confidence and the dollar is declining.
The challenge before us is not to make the mistakes made by these great countries and to make the rise of the rupee stable and permanent. We have to use the capital inflows prudently. It appears, however, that the Manmohan Singh government is implementing those very policies that led to the decline of Germany, Japan and the US.
The government has started imposing higher taxes on the companies to support a bloated welfare state. Government expenditure on education is being raised despite the poor results of these schools. The Employment Guarantee Scheme is being made despite few durable assets being made in other similar schemes.
We are creating a welfare state like Germany. The correct policy is to provide relief in taxes to labour-intensive industries and impose high taxes on capital intensive one. Such cross-subsidisation will lead to generation of jobs and there will remain no need to support a bloated government welfare bureaucracy.
Two pillars
The government has appointed Ratan Tata chairman of the Investment Commission. Indeed, it is heartening that the government is reposing faith in our industrialists. But there is a difference between honouring the businessman and handling over the reins of the government to them. Friction between these two pillars of society is the best policy. Japan had eliminated this friction leading to decline of its businesses. The government is repeating this mistake.
The US used the capital inflows not to invest but to import goods from across the world for consumption. The current trade deficit â excess of import over exports â is in the excess of $500 billion per year. This is being financed by capital inflows. Borrowed money is being used to provide consumption goods to the American people. Not hard work, but ostentatious consumption is being held as the desired role model. No wonder the American people are losing out in competition. Our government is following a similar policy. It is trying to attract all types of foreign investment irrespective of its impact on our society. It should instead make a social audit of all domestic and foreign investment.
The rupee is rising. World capital is turning towards India. We should not fritter away this golden opportunity by making the mistakes made by others. We should use this capital in the right way so that we are able to maintain ourselves as No 1 economy in perpetuity. <!--QuoteEnd--><!--QuoteEEnd-->