The late President Abdul Kalam famously said India is not poor, only our thinking is poor – if you think big, we can equally become a great country. Business India, contrary to the conventional wisdom of the governments of all political parties and successive Governors of the Reserve Bank, has long argued that nowhere does this saying apply more aptly than in our handling of foreign exchange and the rupee. For decades now, the view has been that a steadily declining rupee, vis-à-vis the dollar, is good for exports and growth of the economy.
Exchange control was first brought in during the war, as a temporary measure, but was continued by an Act in 1947. And for the next 50+ years, it only became tighter with each passing year. In 1947, the rupee was arguably stronger than the UK’s pound sterling. And till even the 1950s, when we were a much weaker economy (and country), the Indian rupee ruled supreme from Hong Kong to Kuwait. So much so that India even used to issue a Gulf rupee when today’s oil-rich countries had no currencies of their own!
This is not romanticising the past, or falsely imagining reality, nor is it nationalist chest-beating. It is a simple statement of fact. But the official Delhi view and groupthink have been that a gradually weakening rupee will help accelerate industrialisation and help grow exports, which are vital for the country. But did our exports grow adequately in all those years, or weren’t we left behind by the Asian Tigers and, of course, China? Looking at the Chinese industrial and export juggernaut, their exports grew with lower domestic interest rates and a stable currency – while we followed the exact reverse of higher interest rates and a weakening currency.
Sadly, Delhi’s mandarins treated foreign exchange as a holy cow to be worshipped, and not as a simple commodity tradable like any other, based on price. Over the years, exchange control got tighter and tighter with almost grotesque results. Many of our high-flying CEOs of the biggest US companies remember leaving India with less than $10 in their pockets! And ironically, as debates have raged about convertibility and then partial convertibility in Delhi and so on, the reality is that the rupee was fully convertible in what were then Bombay and Calcutta. The only issue was the price or premium to be paid!
What is more, few have asked who really benefited from exchange control. Businessmen got exchange at the official rate for imports of machinery and raw materials. But year after year, the common man’s savings were eroded in value as he had to spend more of his savings, whether on the education of children overseas, on travel, or on converting his rupees into savings in gold.
It has long been Business India’s view that we just don’t know the strength of our rupee, which has led to a fearful and cowering mindset in relation to the dollar. Yet our own experience in recent years has been that, with the gradual easing of controls, our reserves have kept rising. And the three biggest contributors have been IT exports, investment by foreigners and above all, remittances by our diaspora. Yet, rather than giving them Pravasi Divas certificates, if we freed them from exchange controls and restrictions on the number of days they could stay in India, remittances would double and then double again. This is an advantage no other county in the world has.
Finally, it is worth asking – if all the major economies of the world and even smaller countries like Mauritius, Israel or Uganda have done away with exchange controls, does a strong India under a strong BJP government really need outdated exchange controls?