Romancing the Rupee

Great! So we feel printing more currency notes and distributing it to the poor is a solution to India’s financial crisis. Taking this idea forward, even our debt with the World Bank can be cleared. So cheesy right! But is this a ‘valid’ solution? May be or May not be. To get closer to the truth let’s first see what printing more currency means.

Let’s say I have 10 Gold coins, each weighing 1 gram. Due to obvious reasons, all my needs couldn’t be met by these coins.  After thinking in the shower for a while, I get an Idea. What if I melt all the gold coins, take the 10 grams of molten gold and make 20 coins out of it. So I’m going to have 2o coins. Yeah, you got it right!   Each coin has now become half a gram which was previously one gram. In the quest for more coins, we have sacrificed the amount of gold in each coin. Logic dictates that, if I have to buy a chocolate worth 10 grams of Gold, I have to give all 20 gold coins as each coin now has only half a gram of Gold. So technically we get nothing new. This brings us to a Catch-22 situation.

We get to a similar conclusion by printing more currency. I know it looks like a thin sheet of paper, a currency note is not exactly it. It has a value termed as the ‘purchasing power’. More the currency we print, less the value of the currency, less its purchasing power. Though the real-time variation in money value is much more complicated, the basic theme is not different. Interestingly Zimbabwe used our non-patented printing idea and results were as expected.

 

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A person in Zimbabwe carrying money to buy a loaf of bread. It costed him 35,000,000 dollars absolutely.

Importantly, the discussion here,  gets us to a bigger stream of intimacy. The relationship issues between the U$ Dollar and the Indian रupee. Well, the relationship status is complicated. Bigger questions rise at this point. Why does Rupee succumb to the US Dollar? What impact is this fall creating back home in India? To feel the origins of the problem, let’s travel back in time.

Before life began, God said, let there be two countries in the world. India and USA. And then he created Dollar to USA and Rupee to India. God was not partial. He said, let the Dollar equal the Rupee. One Dollar = One Rupee. And then came people exchanging goods with their skill for their needs. And then the problem started.

India being an agricultural country produced 1000kgs of wheat in surplus. US being a techno-nation produced 1000 extra Laptops. Both the nations decided to exchange their surplus production for money. 1kg of wheat = र10. So US bought the 1000kgs of wheat by paying India $10,000 (1000kgs x Rs.10). At the same time India decided to buy laptops. 1 Laptop = $100. So 1000 laptops costed India र 1,00,000. So, ‘India’ by selling wheat got ‘dollars’ – $10,000 and ‘US’ by selling laptops have ‘Rupees’ – र1,00,000. Both of them decided to go to an exchange board and get home currency.

The present exchange rates are,  “1 Dollar = 1 Rupee”. Life is easy for India presently, It exchanged the 10,000 Dollars with 10,000 Rupees out of 1,00,000 Rupees the US have. Now US has 90,000 Rupees. It needs dollars desperately. The 90,000 Rupees it has won’t work for US citizens. So, US now badly needs a buyer of those rupees in exchange for ‘much needed’ dollars.

After 3 months, comes a young lady in US who wants to set up a business in India. She has $10,000. But she needs rupees. So she goes to the exchange board. She sees the desperation of US for exchanging the 90,000 rupees it has. Then she says, “Well, all I have is 10,000 Dollars. Exchange those 90,000 rupees for these dollars.” Though US got shocked by the cruel deal, it didn’t have any other alternative. It finally agreed. 10,000 Dollars were exchanged for 90,000 Rupees, which means the new exchange rate is,  “1 Dollar = 9 Rupees”

Now, by extracting milk from water, we find two important indicators.

1. Demand for Dollar-Rupee – If  Demand for dollar rises in the market, its inevitable for the rupee to succumb.

2. The quantity and quality of the goods we export and import. By importing costly goods like Petrol, Diesel, Gold, Electronics and exporting cheap goods we again make the rupee dive.

The impacts of  depreciated Rupee are well-known. Imported products get costlier and costlier. Not only the luxuries like Gold and Branded items, but also basic necessities like Petrol and Diesel. This impacts all the other local goods depended on Petroleum products because transportation becomes costly. Hence Inflation (Rise in Prices).

So, the Talisman is – Produce High end specialized goods for exporting by promoting Industrial Growth. This will lessen your burden on the compulsory imports. Last but not the least, Elect a Government which make sure that this happens.

 

 

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