The falling rupee and its impact

Prof E Bijoykumar *

Pic Courtesy : wikipedia/Jovianeye

The last few weeks witnessed a dramatic fall in the value of our currency the Rupee. It even reached Rs 61 per US dollar. In April 2008 it was Rs 40. The good news is that the downward slide has been arrested the depreciation of our rupee against the US$ means that US$ has become costlier.

All items with prices marked in US$ have become costlier in India and all items with prices marked in rupees have become cheaper in USA. Simply stated our imports have become costlier and our exports have become cheaper. Costlier imports will lead to reduction in import of nonessential items. Cheaper export items will bolster the demand for our exports abroad. Lower import and higher export will reduce trade deficit.

Some people attribute it to global forces and US monetary policy. Some attribute it to domestic mismanagement. The current account deficit is 5.5% of GDP with trade deficit hovering around 7%.

A significant part of the growth in import is due to import of gold. The usual route through which the falling value of rupee affects prices is via the price of fuel.

We import 70% of our fuel requirements and because it is a necessity there is little scope for reducing the import bill. The domestic price of fuel depends on the global price and the exchange rate.

The hike in the price of fuel feeds inflation as it will have an effect on cost of production of most industries. Domestic inflation makes our exports less competitive and we lose part of the advantage of lower export price. With lower inflation rate and falling value of the rupee our export items would have become cheaper abroad.

The question of interest to us is: how does the falling value of rupee affect us in Manipur? We will face an inflationary situation. It is serious and equally challenging. It will have two components : one due to the rise in fuel prices and secondly one due to overall increase in prices.

How does the fuel price respond ? Our fuel price is as fragile as exchange rate. Most of the petrol pumps are closed as soon as a blockade is announced. The administration also chips in by announcing that there is stock for nine days. Thus, prices rising to Rs 120 are no longer a shocker.

Currently we are passing through a crisis triggered by the landslide and most of us, despite km long queues in front of petrol pumps, buy petrol in the grey market at Rs 120 per litre. Some smarter people are using their stocks. Sometimes it is not the price that worries us but the unpredictable quality of fuel in the grey market.

The high price of fuel in the grey market will be built in our prices ruining our calculations . However the rise due to falling value of rupee will be a small proportion of the actual rise. When it comes to import it is more direct. When we go abroad and send our children abroad we have to pay more.

Our prices will also rise due to the rise in prices in states which supply our needs.The only section who benefits from this is those who receive US$ .this segment ,though still very small, has been growing. I believe that emigration to the USA is associated with age in Manipur. Only young people migrate.

The difference between migration of the young and old people is that most old migrants leave their families and they send the remittances back home over a long period. Young people normally settle down and establish a family there. Hence the remittances associated with them dry up faster.

Investment by non resident Manipuris is still invisible though one cannot dismiss outright the possibility of such investment waiting in the wing. We are familiar with associations based in the USA, Canada and UK recently such non resident Manipuri organisations have become more vocal and hence visible. In short remittances are not important.

The recent fall in the value of rupee will further accentuate the inflationary situation due to the landslide induced shortage. It will operate as in any part of the country.