Topic: Fall of rupee, swine flue and onion.
As we cannot say when can a man’s health will fall we can’t say either when a nations health will fall. But we can surely assess the reasons and consequences of both the incidents and we can also give some remedy on such problem to a limited extent.
Recently the falling of the rupee increased concern of government officials andcommon man also.
When a man suffers from swine flue, cough, temperature and cold are symptoms of this disease and doctor do not give him separate tablets a tablet for cough, a tablet for temperature and a tablet for catching cold he gives that patient all included tablet i.e. Tammyflue: the tablet on swine flue. Similarly falling value of rupee and increasing current account deficit are not the diseases but merely the symptoms of ill economy.
Reasons behind falling value of rupee: There are two types of reasons
A) International Reasons and B) Domestic Reasons
A) International Reasons: -
1. The US investors invested large amounts of investments into Indian Economythe fear among the USinvestors that US Federal bank can soon stop their scheme under which they were purchasing debentures from market every month and generating huge amount of money into the US economy.(Name of the scheme was Quantitative Easing OR QE).
2. The above fear provoked US investors to withdraw their investments from Indian Economy and fulfill their domestic need of liquidity if any situation of urgency occurs in US due to closing of QE scheme.
3. Global slowdown is one of the reasons by which demands for Indian goods in global market has fallen down.
when demand of Indian goods falls in global market demand of rupee falls down ( they don’t need rupee if they are not purchasing Indian goods) in global market which certainly affects the value of INR.
As compared to global conditions there was no such sign of huge slowdown in Indian Economy so the demand of goods in Indian market did not fall rapidly that means imports of goods did not fall and that import created demand for US Dollar ( theglobal currency).
The situation when imports do not fall and exports decreases results in decreasing value of INR
4. Rising prices of petrol resulted in rising in amount of imports as India is dependent on Arab countries for supply of petrol.
5. There are some other reasons like selfish nature of developed countries who often refused to help India and at some times taken advantage of critical economic conditions of Indian economy .At times they imposed unfair conditions on India which caused India great loss.
B) Domestic Reasons :-
1.Continuous current account deficit: current account deficit aggravated the fall of INR and made it Thegreat fall of INR.
2.Huge imports compared to exports: since we started planning in India our imports grown rapidly and in huge numbers as compared to exports. The reason is our economy is a developing economy which needs certain inputs like machinery, technology etc. and that inputs cannot be produced by a developing nation itself therefore used to import such inputs. Prices of such inputs are obviously too high which makes our imports bulky.
3. Over reliance on imports for petrol: As India is making development she is facing the problem of increase in demand of petrol. Since India is not able to produce petrol India needs to import petrol for its economy to run.
As India is depended on imports for 80% of its domestic use of petrol, there is no such possibility of cutting down current account deficit.
4. Huge imports of gold: India is a gold lover country no one in India marries without wearing gold. India is greatest consumer of gold but not the greatest producer of the gold therefore we need to rely on imports for gold which is produced by China, US and African countriescreates current account deficit and results in fall in the value of rupee.
5. Poor performance of production sector : As India is transformed directly from agricultural economy to service sector economy no progress of production sector is made as compared to service sector therefore India is not able to export its goods because the goods India produce are used to fulfill domestic need and no such surplus remains to export. Poor quality of goods compared to international standards is an issue also.Both resulted in poor exports which is one of the reasons for deficit in current account.
Steps taken by Government of India and RBI to stop Great fall of rupee:
1. GOI increased duties on import of gold;duties on imports of gold were 2% which was increased to 10% by GOI at the end of June 2013.
2. Marginal Standing Facility (i.e. MSF a type of loan, RBI gives to scheduled banks to maintain liquidity) was decreased.
3. Bank rates were raised to certain extent to draw out liquidity of the market. The liquidity in market produces demand for goods and this demand produces imports.
4. Debentures were sold by RBI to draw liquidity out of the market.
5. An appeal was made by ministers to the people that they should not buy gold and hold their love for gold.
All these measures taken to stop the falling value of INR were short term measures they vanish in long run.
“When huge stones falls from the cliff of mountain it is foolish to give it support of a match stick.”
Therefore searching of the fuel alternate to petrol, strengthening production sector, inspiring food processing industries could be some positive steps in long run. If enough emphasis were given on food processing it will make economy run faster and safer.
Suppose in Maharashra onions are produced on huge level when a year onion is produced more than enough its prices falls down but another year due to unfair natural conditions production of the onion falls down this results hike in the prices of the onion but when there will be enough food processing plants, suppose for onions if there will be a plant which makes fine paste out of onion then the farmer will not have to sell the whole of his onion to the market at falling prices he can himself make process on the onion which will prevent him against great loss, in addition to that a new industry of food processing will be flourished which will help us to increase exports and cut down on current account deficit. A market based price control system will be established abolishing the need of government’s attention to the price level in the country.
Results of Great fall of rupee if it continues to further:-
1. Increasing import expenses: If falling trendin the value of rupee continued it means we will have to pay more money for every import we make. Outflow of currency will increase and huge amount of property of Indians will be drawn to foreign countries.
2. Increase in the value of dollar or fall in value of rupee will make current account deficit more adverse than ever for India.
3. There will be some inspiration to the exporters but due to low production of goods and small number of export industries India will not be able to avail the situation.
4. As the value of the dollar in Indian currency is increasing we are paying more rupees even though there is no price hike in the value of petrol.
5. Inflation is increasing on domestic levels: As we are paying more for petrol the travelling and transportation expenses are increasing and for that we will have to pay more money for goods coming to us via transportation.
6. Every nation takes loans from international institutions India also has taken loans from international institutions, now the value of dollar is increased for Indian rupee so our loans has increased (we have taken loans in the form of dollar when value of dollar increases for Indian rupee we have to give more rupees for the same amount of loan). That means our loan liability has increased.
As many nations India is now deeply connected to the global economy, now it is impossible for any economy to grow in isolation. Whether you wish or not effects of global situations on Indian economy are inevitable we can prepare our self for the upcoming situations but we cannot avoid them.
References : 1Bharatiya Arthvyavastha By Datta and Sundaram
2 Daily newspapers LokamatSatara(Marathi), Lokasatta (pune :marathi newspaper) and Daily Sakaalmarathi (satara)
byVikram Prakash Otari .
As we cannot say when can a man’s health will fall we can’t say either when a nations health will fall. But we can surely assess the reasons and consequences of both the incidents and we can also give some remedy on such problem to a limited extent.
Recently the falling of the rupee increased concern of government officials andcommon man also.
When a man suffers from swine flue, cough, temperature and cold are symptoms of this disease and doctor do not give him separate tablets a tablet for cough, a tablet for temperature and a tablet for catching cold he gives that patient all included tablet i.e. Tammyflue: the tablet on swine flue. Similarly falling value of rupee and increasing current account deficit are not the diseases but merely the symptoms of ill economy.
Reasons behind falling value of rupee: There are two types of reasons
A) International Reasons and B) Domestic Reasons
A) International Reasons: -
1. The US investors invested large amounts of investments into Indian Economythe fear among the USinvestors that US Federal bank can soon stop their scheme under which they were purchasing debentures from market every month and generating huge amount of money into the US economy.(Name of the scheme was Quantitative Easing OR QE).
2. The above fear provoked US investors to withdraw their investments from Indian Economy and fulfill their domestic need of liquidity if any situation of urgency occurs in US due to closing of QE scheme.
3. Global slowdown is one of the reasons by which demands for Indian goods in global market has fallen down.
when demand of Indian goods falls in global market demand of rupee falls down ( they don’t need rupee if they are not purchasing Indian goods) in global market which certainly affects the value of INR.
As compared to global conditions there was no such sign of huge slowdown in Indian Economy so the demand of goods in Indian market did not fall rapidly that means imports of goods did not fall and that import created demand for US Dollar ( theglobal currency).
The situation when imports do not fall and exports decreases results in decreasing value of INR
4. Rising prices of petrol resulted in rising in amount of imports as India is dependent on Arab countries for supply of petrol.
5. There are some other reasons like selfish nature of developed countries who often refused to help India and at some times taken advantage of critical economic conditions of Indian economy .At times they imposed unfair conditions on India which caused India great loss.
B) Domestic Reasons :-
1.Continuous current account deficit: current account deficit aggravated the fall of INR and made it Thegreat fall of INR.
2.Huge imports compared to exports: since we started planning in India our imports grown rapidly and in huge numbers as compared to exports. The reason is our economy is a developing economy which needs certain inputs like machinery, technology etc. and that inputs cannot be produced by a developing nation itself therefore used to import such inputs. Prices of such inputs are obviously too high which makes our imports bulky.
3. Over reliance on imports for petrol: As India is making development she is facing the problem of increase in demand of petrol. Since India is not able to produce petrol India needs to import petrol for its economy to run.
As India is depended on imports for 80% of its domestic use of petrol, there is no such possibility of cutting down current account deficit.
4. Huge imports of gold: India is a gold lover country no one in India marries without wearing gold. India is greatest consumer of gold but not the greatest producer of the gold therefore we need to rely on imports for gold which is produced by China, US and African countriescreates current account deficit and results in fall in the value of rupee.
5. Poor performance of production sector : As India is transformed directly from agricultural economy to service sector economy no progress of production sector is made as compared to service sector therefore India is not able to export its goods because the goods India produce are used to fulfill domestic need and no such surplus remains to export. Poor quality of goods compared to international standards is an issue also.Both resulted in poor exports which is one of the reasons for deficit in current account.
Steps taken by Government of India and RBI to stop Great fall of rupee:
1. GOI increased duties on import of gold;duties on imports of gold were 2% which was increased to 10% by GOI at the end of June 2013.
2. Marginal Standing Facility (i.e. MSF a type of loan, RBI gives to scheduled banks to maintain liquidity) was decreased.
3. Bank rates were raised to certain extent to draw out liquidity of the market. The liquidity in market produces demand for goods and this demand produces imports.
4. Debentures were sold by RBI to draw liquidity out of the market.
5. An appeal was made by ministers to the people that they should not buy gold and hold their love for gold.
All these measures taken to stop the falling value of INR were short term measures they vanish in long run.
“When huge stones falls from the cliff of mountain it is foolish to give it support of a match stick.”
Therefore searching of the fuel alternate to petrol, strengthening production sector, inspiring food processing industries could be some positive steps in long run. If enough emphasis were given on food processing it will make economy run faster and safer.
Suppose in Maharashra onions are produced on huge level when a year onion is produced more than enough its prices falls down but another year due to unfair natural conditions production of the onion falls down this results hike in the prices of the onion but when there will be enough food processing plants, suppose for onions if there will be a plant which makes fine paste out of onion then the farmer will not have to sell the whole of his onion to the market at falling prices he can himself make process on the onion which will prevent him against great loss, in addition to that a new industry of food processing will be flourished which will help us to increase exports and cut down on current account deficit. A market based price control system will be established abolishing the need of government’s attention to the price level in the country.
Results of Great fall of rupee if it continues to further:-
1. Increasing import expenses: If falling trendin the value of rupee continued it means we will have to pay more money for every import we make. Outflow of currency will increase and huge amount of property of Indians will be drawn to foreign countries.
2. Increase in the value of dollar or fall in value of rupee will make current account deficit more adverse than ever for India.
3. There will be some inspiration to the exporters but due to low production of goods and small number of export industries India will not be able to avail the situation.
4. As the value of the dollar in Indian currency is increasing we are paying more rupees even though there is no price hike in the value of petrol.
5. Inflation is increasing on domestic levels: As we are paying more for petrol the travelling and transportation expenses are increasing and for that we will have to pay more money for goods coming to us via transportation.
6. Every nation takes loans from international institutions India also has taken loans from international institutions, now the value of dollar is increased for Indian rupee so our loans has increased (we have taken loans in the form of dollar when value of dollar increases for Indian rupee we have to give more rupees for the same amount of loan). That means our loan liability has increased.
As many nations India is now deeply connected to the global economy, now it is impossible for any economy to grow in isolation. Whether you wish or not effects of global situations on Indian economy are inevitable we can prepare our self for the upcoming situations but we cannot avoid them.
References : 1Bharatiya Arthvyavastha By Datta and Sundaram
2 Daily newspapers LokamatSatara(Marathi), Lokasatta (pune :marathi newspaper) and Daily Sakaalmarathi (satara)
byVikram Prakash Otari .
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