[drsingh]

Originally Posted by pramodkumar

Dear all,

great views, but here is my take i run a small company

for us and FTE (full time equivalent) is around 1000 USD/ month, out of which we pay around 30k INR to the employee and other overheads cost another 15k earlier with $ at 45 we were barely managing, now i have more than 20k/FTE extra, this is great news for me.

Dollar going up will only effect oil prices, and its great for investments as now companies are ready to offer FTE's at 800$ against 1000$. so foreign companies will invest more.

I am happy that the dollar price is going up and would love to see it doing even better

These are my personal views.

Pramod

well this is what will attract FDI when the rupee becomes so cheap that risk reward ratio becomes mouth watering. But it will push up inflation which is a cruel way to tax the poor/middle class and shift profits to the corporates. and it will result in more labour unrest.,

[patil]

Originally Posted by vasudeva

I can go on and on but clearly someone badly needs to open an economics book.

Well I don't want to get personal here but I have read my share of economics and it was my subject during the first two years of my graduation. However I want to make it very clear here that patriotism is higher than economics. If America can play dirty tricks to safeguard its dollar we can definitely stop using dollars as much as possible.
My common sense tells me that lesser the demand lesser the price and if we use less dollars the price of the dollar will come down.

Originally Posted by 999

Patriotism is good to have. Green back is the global currency. Stopping to use American products does not save dollars as we will have to pay the equivalent in dollar for another country as well. We pay in dollars for oil in Iraq. we pay in dollars for 99% of our imports. Not all of them are neccesarily American.

That's exactly what I meant why do we need to pay in dollars for crude, cos America compels the OPEC to sell crude only for dollars which is due to America's dirty tricks. So the rest of the world needs to teach America a lesson and when dollar falls due to less usage than things should come to normal.

Originally Posted by carboy

How will buying from Japan or Korea help?

We can pay them in their respective currencies and not use dollars. The entire dollar dependency should come down. why is dollar the world standard for currency and commodity evaluation and why not any other currency. If oil is the most traded resource in the world apart from food then why the currency of the oil producing countries is not the world standard.

Mod Note: Please use the 'Edit' button, to add more information to your post if within the required posting time, rather than creating new posts.

[carboy]

Originally Posted by patil

We can pay them in their respective currencies and not use dollars.

Where are we going to get Japanese and Korean currency from?

[HillMan]

Iraq tried to use euros instead of $$$. There was no WMD. Others will get to see trade sanctions.

For India it will be Pakistan getting more money for helping anti terror operations in Afghan. Where does Pakistan use it?
We have to then pump up defence spending.

Developed nations play well and control indirectly.

Can't touch crude, the world economics will change. Falling dollar has global impact. Most countries heavily invest in federal bonds.

That said there has to be corporate responsibility to improve the surroundings and grow with it. Make decent profit. Not just exploit for profit of the share holders. This will have a win win situation in long run.

[vasudeva]

Originally Posted by patil

Well I don't want to get personal here but I have read my share of economics and it was my subject during the first two years of my graduation. However I want to make it very clear here that patriotism is higher than economics. If America can play dirty tricks to safeguard its dollar we can definitely stop using dollars as much as possible.
My common sense tells me that lesser the demand lesser the price and if we use less dollars the price of the dollar will come down.

Cannot help but thinking that something is obviously very wrong. We can stop using our dollar or use it less. Then what do we pay our imports from.
1 Rupees: how many accept it.
2. Perhaps Burmese or North Korean currency or even the Yen or the euro. None is an international currency.

Perhaps people who have got economics instead of just reading should be aware that for better or worse the US$ is the international currency and the currency of trade just as the sterling was a long time back. There is of course other currency denominated trade globally but that is insignificant. Your not using $ or using lesser $ is not feasible or can you specify how do you intend to pay for your imports or charge for your exports.

Trade and finance understands the $ as the currency and going against this will lead us quickly to the road to ruin. Let our country become stronger and then we can have aspirations of paying for our global purchases in rupee. However, unless we want to be ruined, we cannot do it now or in the next few decades either (outside of Hollywood movies where a nuclear bomb or meteorite obliterates the entire world but leaves India and Burma unscathed). Let our Government and the Govt of the Arab world raise this issue as to why they should not pay in their own currency.

I am off now. Have had enough of my opinion. Feel free to show the result of your reading in economics without any future comments from me.

[extreme_torque]

Fascinating, logical arguments. The question is, is there any way out of this rut without the changing in establishment because I don't see it happening.

[PatienceWins]

US is artificially inflating dollar value by making it the standard currency for crude. It will not allow anyone to use an alternate currency - we know what happened to Sadham Hussain and Muammar Gadhafi.

http://www.youtube.com/watch?v=REMwp6VKGwU

Originally Posted by phamilyman

Disagree completely on this - it should be "pay full price". The problem of govt finances comes due to the subsidy, not the scale of consumption.

We middle class should pay our due and that itself will solve a fair bit of the problems (but the majority will remain).

Consumption should reduce because of a desire to conserve resources for our next generation, and not out of a misplaced hope that it'll improve India's exchange rate

I agree that the middle class should pay full price - for petrol and DIESEL. This will bring down fiscal deficit, not current account deficit. I have a petrol car.

The rupee depreciation is due to current account deficit and net capital flows ("hot money" flowing out of India to US recently with prospects of tapering of bond purchase by Fed). Current account deficit can be controlled by reducing import (fuel being a major component here) or increasing export (iron ore, IT, garment etc). A salaried person/ common man can only control the import part with his consumption pattern and investment habits (equity market will not be mainly dependant on FIIs). That is the point I was trying to make.

There may be an argument that a depreciating rupee is good for exports, but high inflation and interest rate hike is not good for industry and common man as a whole, which affects all of us.

[999]

Originally Posted by PatienceWins

US is artificially inflating dollar value by making it the standard currency for crude. It will not allow anyone to use an alternate currency - we know what happened to Sadham Hussain and Muammar Gadhafi.

Add Iran to it. There were some curious incidents when Iran started the first oil Bourse with Euros. Yuan is doing what is can with the ASEAN countries and that is one of the reasons for US to change it foreign policy with more importance to the SE Asia.

[Turbo_Charger]

Remember reading sometime back in Hindustan Times that India had an agreement with Iran for Crude Oil Imports. India didn't need to pay Iran in US $ Dollars but in Indian Rupees. The Money was routed through a Bank in Turkey. We didn't even have to pay them because Iran would buy foodgrains or some other stuff from us, so it was in effect a Barter System.

Sadly, US levied sanctions and forced India to decrease their Purchase of Crude from Iran and India compiled wholeheartedly. Currently there are talks going on with Iraq for oil and hope it succeeds as we need Oil.

Also I support that the middle class should pay the full price for both Petrol and Diesel, given they are Taxed sensibly. It is illogical for any government of a growing economy to try and mop up a huge sum of money by insanely taxing Petrol and Diesel like our government does. Both the State and Central Governments should look into it and reduce taxes as it will atleast reduce inflation.

[ahmad.007]

I feel we should have a system like farmers should pay less for diesel, and others (middle class) should pay full price, and upper class (Fortuner/XUV and other fuel guzzlers, no offence) should be taxed. :frustati
Sorry, but I feel bad when I see a big SUV being used by a single person and that too inside city (sorry people, but I don't mean any offence). I know, they pay taxes et al, but I still see it as a waste of fuel (again, sorry to say). People should change their mentality, and should try to reduce their energy footprint, and atleast try to save fuel (as it constitutes a huge chunk of our import bill). I am not questioning anyone's credibility to use any vehicle, its only a request.

Another thing I feel is the lack of encouragement of electric vehicles by the government. Mahindra/Reva, built an indegenous (spell check) vehicle e20, which was good as a starter, I felt it deserved a subsidy as it would have fetched back that amount to the govt in the form of reduced oil import. But, no, the government is short minded.

Again, please pardon my noobness, I am a noobie when it comes to finance and economy, so my 2 cents (now degraded to about 1.5 due to rising rupee) are also in relation to cars, and this is what I feel as a layman.

[nareshov]

Originally Posted by Turbo_Charger

Remember reading sometime back in Hindustan Times that India had an agreement with Iran for Crude Oil Imports. India didn't need to pay Iran in US $ Dollars but in Indian Rupees. The Money was routed through a Bank in Turkey. We didn't even have to pay them because Iran would buy foodgrains or some other stuff from us, so it was in effect a Barter System.

Sadly, US levied sanctions and forced India to decrease their Purchase of Crude from Iran and India compiled wholeheartedly. Currently there are talks going on with Iraq for oil and hope it succeeds as we need Oil.
...

Here's more news on that: http://www.reuters.com/article/2013/...91H0AN20130218

NEW DELHI | Mon Feb 18, 2013 7:50am EST
(Reuters) - India is now paying Iran only in rupees for its oil after it lost another payment route in euros due to tougher sanctions from February 6, sources at local refiners said, leaving Tehran struggling to use the tightly-restricted Indian currency.

[nmo]

Disclaimer upfront: I have not gone through the entire thread and the links attached so please pardon me in case there is some repetition.

My 2 cents:

1. We should accept that Rupee between Rs 60 - 70 is the new normal. It would mess up our household budgets, any personal overseas travel / education plans and increase living costs, no doubt about it.

But we have lived and managed in worse times. All you need to do is recall pre-2002 days.

Somehow, we conned ourselves as a society by believing that India had arrived in the 2003 - 2008 era thanks to our media and politicians. It was just excess global liquidity that caused everything to go up. We had cheap loans, credit cards, high salary increments, property prices going up 3 - 6X all over india and everyone made money and ended up owning cars, houses and huge lifestyle changes like taking expensive vacations, visiting malls every weekends and mindset that any Indian needs to buy his/her first 2 wheeler at age of 18 and 4 wheeler at age of 25 and house at age of 28 just before or after marriage. However, people forget that these are assets acquired by taking loans and while the house / flat / vehicle may be registered in their name, the assets are mortgaged and they will own it only after they have repaid the loans and they have significant monthly outflows in terms of EMIs to pay and living costs.

2. However, this is something that had to happen sometime thanks to poor governance and policy paralysis of the government in last 3 years who did not correct major macro-economic issues that have been plaguing our economy. We have 4.8% of GDP as Current Account Deficit (CAD) whereas most economists agree that not more that 2.5% of GDP is sustainable as CAD for emerging economies.

This would still be acceptable if this US$ 80 billion of CAD were used to create public assets like building infrastructure (Roads, Railways, Irrigation structures, Bridges, Sewage / Drainage networks, Schools, Hospitals, Parking, Parks) etc

However, government expenditure is going up in terms of salaries, other expenses and subsidies most of which have huge leakages, inefficiencies and corruption associated but will not be curtailed and be expanded thanks to the Food subsidy bill that is driven by political compulsion of the Congress party with a view to garner required votes in the next elections.

3. However, not all is dark and gloomy in the medium term. A depreciating Rupee will help the exporters become more competitive including the IT / ITES industry, Pharma, commodity exports etc. It will even help the automotive exports for that matter and help India become the automotive hub. Any manufacturer with high localisation would benefit. That is a no-brainer.

Things that the government could do immediately and are possibly being done by FM at the moment to help the matters:

1) Get the iron ore mining back on track quickly - only the reputed corporates and certainly not the cronies and relatives of the netas. We should use as much of domestic steel as possible and export the rest.

2) Get coal mining back on track. It will take time as coal mines need capital investment but it has been ironic that public sector companies like Coal India have been allotted coal blocks where underground excavation is required making it uneconomic to excavate coal where cronies / friends of politicians have been allotted coal blocks where surface excavation is possible. These must be developed as quickly as possible to reduce coal imports. All environmental clearances must be expedited by creating a coordination cell to oversee quick implementation possibly under PMO or an inter-ministerial group.

3) Get all stalled projects (including power) quickly back on track. There are huge investments made by private sector running in thousand of crores that are struck for want of some clearance, land acquisition issues, litigation etc that need to be expedited.

4) Get international giants to manufacture all electronic goodies in India starting from basic semiconductor chips to sub-assemblies to finished goods. It is a shame that we import most of the phones, flat panel televisions etc.

5) Get high profile cases like Vodafone tax issue sorted out amicably that is scaring foreign investors from investing in India.

6) Incentivize citizens who use solar power, water harvesting etc in terms of actual power / water saved.

7) Invest in skilling / vocational courses that will help our youth find jobs. Provide tax breaks to industries that employ large number of people (even a 3-5% tax graded tax incentive would help).

8) It should be mandatory for all government departments to be automated with comprehensive e-governance IT implementations with on-line e-citizen services. Central government can get the model software developed and provide it free-of-cost to state governments with source code.

9) Aggressively go for road and railway building programmes.

10) Get defence equipment manufacturers to set up shop in India with long terms purchase commitments to buy in Indian rupee.

I am sure we can come up with hundreds of such suggestions. All these require quick and sustained implementation.

It would also help if RBI would actively intervene in the currency market to address undesirable speculation by currency traders. That would be good use of the US$ 280 billion foreign reserves that our FM so proudly talks of. After all, these currency traders have already made tons of money at the cost of the common man.

[shankar.balan]

Good post Nmo

We have a lot of intelligence in our country. Pity that none of that intelligence appears to have found its way into the ugly pigheads of our political classes.
We require a 50 year dictatorship with which we can clean up everything.

[Hayek]

Interesting thread. I would certainly have liked to Thank a number of the posters here - maybe we should consider that for Shifting Gears as well.

Some thoughts. Exchange Rates are fundamentally determined by the balance between Capital Flows and Current Account Flows. Changes in both of these reflect the competitiveness of economies - so your exchange rate is a messenger, telling you how you are doing. Of course like all market based messengers, it is not perfect - it is influenced by sentiment, and may over or under react.

When I started my career in the mid 1990s (and I have been a consultant or banker throughout my career ), we used to work with an assumption that the INR would depreciate by 5% p.a. against the USD every year. Why? 10% inflation in India, 2% in the USA and a 3% real appreciation of the INR due to India becoming richer (poor countries need exchange rates that are undervalued on a purchasing power parity, or PPP, basis - and as they become richer, the exchange rates converge towards PPP). If you look at the movements of the INR, this held all the way from the start of liberalisation till 2000, when the exchange rate hit INR 49 or 50 per USD. But then, the INR reversed - and appreciated to INR 45 per USD and stayed there for a decade.

Why did this happen? Two reasons. The hard work done through the late 1990s to reduce deficits and inflation paid off, and inflation expectations for India moved down to 4-5% from 10%, which implied a flat nominal exchange rate based on the above formula. And the opening up of the economy across sectors, plus PSU divestment (strategic sale of PSUs, not dribbling stock into the market) + the BRICs report made people think that India was the next China and attracted foreign investment here. Reducing inflation meant that the Current Account Deficit (CAD) was stable or reducing (also aided by the boom in IT exports after Indian companies proved themselves during the Y2K scare), and Capital Flows too turned positive.

So what went wrong? A typical Indian trait - patting oneself on ones back and thinking that the war is won as soon as the first skirmish is over. We bought the BRICs hype, and decided we could do whatever we feel like and continue to grow. Unproductive Government expenditure sky rocketed driven by the 6th Pay Commission, which massively increased pay for government servants, the bank loan waivers, NREGA, the stimulus post the 2008 Global Crisis and a massive increase in corruption. The attitude of the bureaucracy went back to the bad old ways - where they thought that they are doing businessmen a favour by letting them invest in India. Cases like the Vodafone tax case, and even more ridiculous cases against Shell, Nokia et al have made India a bad word in board rooms around the world. Think the iron ore export ban or revoking mining lease allocations to companies like Vedanta after they invested billions.

Net result, inflation between 2008 and 2012 has averaged 8-9% p.a., at a time when global inflation has been less than 1% p.a. That would imply a need for 4-5% depreciation in the INR over this period. But amazingly, the INR was stable till mid 2011 - perhaps because markets thought that this increase in inflation was a blip (and due to the capital flows arising from the feeling that the West was dead post crisis, and BRICs were the place to be). The Indian economy became uncompetitive, and the CAD rose - to 5% of GDP. The current crash in the INR is a necessary correction and will make our economy more competitive. However, whether this is sustained depends on investor confidence - whether they invest to tap opportunities arising from the depreciation, or think that dealing with our politicians and bureaucrats is not worth the hassle. Unfortunately, the behaviour of our government does not seem to have changed - look at how barring a lone Yashwant Sinha, no one has the guts to say that passing the Food Security Bill in such a economic environment is lunacy of the highest order, or how the Ministry of Health is hell bent on driving out investors in the pharma sector.

The RBIs ham handed actions have not helped either. They drew a line at Rs. 60 per USD even though they did not have the resources to defend it, keep blaming speculators, and have imposed ham handed capital controls. Eg., only USD 1.2 billion left India under the USD 200,000 remittance scheme. That implies just 6000 people used that limit. The RBI reduced the limit to USD 75000. If even 16,000 people use this lower limit, remittances would be the same. But these controls on domestic investors have created a sense of panic, got FIIs to pull out, made NRIs delay remittances to India to wait and see where the INR settles, and perhaps would induce more people to open foreign accounts and use the USD 75 k limit. After all, for most of us, USD 300 k for a family of 4 is more than our total savings - and the risk that more people start using this limit is enormous.

So where will the INR settle? If the GOI mends its ways, the fall in the INR is probably over-done. But my advise would be to hedge - aim to move 40-50% of your savings out of the country.

[vasudeva]

Originally Posted by Hayek

The RBIs ham handed actions have not helped either. They drew a line at Rs. 60 per USD even though they did not have the resources to defend it, keep blaming speculators, and have imposed ham handed capital controls.

On this point specifically, I remember doing my MBA summer training in the 1990s (the report is still on google at my institute) titled `Exchange Rate Management and Interventions'. The conclusion through research into various research papers was that no central bank had the power or resources to intervene in currency markets to get the currency to their target level. They would run out of resources and still not much would happen. I did that research two decades. The recent RBI's intervention made me curious as to whether things have changed. Obviously not.

As to rupee depreciation, your points are valid. According to basic economics, imports are directly and positively related to income, and people seem to forget that no country can manufacture everything and they need to import in order to export. Their is a huge amount of import intensity in our exports (eg in gems and jewellery and petroleum). Nearly one third of our exports are of these two items and at least in gems and jewellery, we have nil domestic resources. People who complain about imports or their destinations forget that our economy and business will not survive a day without those. Some are consumed (and yes in industrial sectors) but a lot are embedded in value added exports. I can think of only a few agri items, cotton textiles, and steel where exports constitute primarily directly domestic resources. Even in those, there is a power and steel component which require imported coal and gas. People can say that we should not import fertilisers but we simply have little domestic resources of two main constituents ot of NPK, and even in urea/nitrogen, it is cheaper to make it in gas rich Gulf states and ship it to India. Without having studied economics and consequently not knowing about Ricardo, people want us to self sufficient. So what if will entail paying a lot more for each stuff. A t least it is patriotic. We will at least become patriotic and extremely poor.

Final: your avatar `Hayek' the icon of conservative eco who I think is famous for his polarising book `The Road to Serfdom'. No point in going about what it is about. We did study that book and that was one point of view in econ. which was obviously anathema to more left-wing economists.