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August 30, 2013

Why the rupee is sliding. For dummies.

Filed under: Uncategorized — Tags: , , — neosurya @ 05:31

There are economist reasons, there are leftist/rightist reasons, there are anti-green explanations. Here is “why rupee slides for dummies”:

  1. India is unproductive when it comes to manufacturing.  We do not have reliable infrastructure and manufacturing suffers due to this. When there is no manufacturing, we have to import products. No manufacturing also means less jobs. If one does not have a job, and one is asking others to give them stuff, then one is poor. Poor countries have currencies that slide. Hence the rupee also slides.
  2. We have old laws and corrupt officials. Other countries also have old laws. But due to corruption, instead of trying to inform the citizen of what is the rule, most just show you a short cut around the law. The short cut then catches up, with the citizen having to shell out more at a later time. The worst case is that since you have to pay the presiding official anyhow, there is little incentive to follow the rule. This significantly increases the “time wasted” by Indians. This time waste is the single biggest cause of an  “unproductive” India. The rupee slides again because of this unproductivity (See point 1 above).
    • I will use the example of a building: A friend was recently getting a house constructed, and shared with me the floor plan made by his architect. Apart from a 2 feet space at the front, there was absolutely no space anywhere around the house. I knew that the plan was illegal (I know a few building rules). The architect agreed (after we asked him) that all rules were not followed. But, he brushed it off saying that the officials would have to be bribed anyway, so might as well do it like this and get the extra floor space. The plan had been approved by the local municipality and the architect may not have even said this if we did not ask him. Imagine a genuine business man, who has to open a new store, or work in an area like the chemical sector. These same issues effect them – being told that their pollution control units could be of a certain size when they should not be, being told that 200 should be paid as tax, when the actual tax is 20000 etc.
  3. The middle class is short-sighted and mostly greedy. The middle class can actually afford the increased prices but will harp endlessly about inflation. They will not pay their servants good wages, or give a decent tip at a hotel. This leads to reduced rotation of money, less growth of the economy, and makes the rupee slide.
  4. Fuel Subsidy. One of the biggest areas where India pays dollars is to buy fuel. Every time India buys fuel, Rupee slides a bit. I have particular hatred for folks who earn above 50K and insist that they should get subsidy on gas cylinders. They can spend 4K on a single dinner, but do not have the common sense to appreciate that subsidy on 9 cylinders is just Rs 3,915 (The subsidy is Rs 435 per cylinder and 9 such cylinders a year). I had a tough time telling my family that we did not want the subsidy.
  5. The real money has gone to Switzerland. What remains is fake money. Anything fake has to be cheap, unless it is the expensive fake that actors flaunt (ok, I am digressing here).

 

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