INNUMERABLE FACTORS DETERMINE VALUE OF A CURRENCY

The rupee’s recent slide gave politicians a chance to exhibit their economic illiteracy. As the currency slipped below Rs 70 to the US dollar, Congress president Rahul Gandhi tweeted:“The Indian rupee just gave the Supreme Leader a vote of No-confidence, crashing to a historic low. Listen to the Supreme Leader's master class on economics in this video, where he explains why the rupee is tanking.” His party followed it up with another “master class” in ignorance, by tweeting: “Modiji finally managed to do something that we couldn’t do in 70 years.”



Both tweets got an enormous round of retweets and likes, suggesting that economic illiteracy is widespread. That every media channel took “rupee at 70” as some kind of proxy for economic mismanagement also tells its own story. For the record, the United Progressive Alliance (UPA) did not quite fail in its efforts to bring the rupee towards 70. It nearly managed that feat in 2013. For those who have forgotten history, in late August 2013, the rupee fell by the largest margin in 18- years, hitting 68.85, and forecasters were predicting a fall to Rs. 70 – a development arrested by aggressive Reserve Bank of India interventions and sharp hikes in interest rates by Raghuram Rajan. Narendra Modi, who criticised that particular fall in 2013 in bombastic terms, was as guilty of political hyperbole then as Rahul Gandhi is today. Only, this time the political rhetoric is less warranted, for there is no clear evidence of economic mismanagement by the Modi government.



The point to underline is the tendency to use absolute numbers to define any government’s performance or non-performance rather than the rate of change. It is not the absolute level of the rupee that tells us how our currency is faring against the dollar, but its rate of descent (or ascent). So, quite apart from Rahul Baba’s Congress party not getting it correct in asserting that this negative “achievement” was only that of Bharatiya Janata Party, it has flunked the main test of economic sense. Comparing absolute numbers is silly because it does not tell us what is really happening in terms of change. At no given level of exchange rate can we deduce anything about the currency’s performance. Rahul Gandhi and his party can well say, for example, that the consumer price index (CPI) number (and not the change over last year) has never been higher; barring extreme deflation, price indices in a growing economy will usually go in only one direction: up. What matters is the rate at which it rises.

Ditto for gross domestic product (GDP) totals.



It would be absurd for Modi to claim India’s GDP achieved its highest absolute level in terms of lakhs of crores under his leadership, when growth rates – as opposed to GDP in rupees crore – were surely higher on an average under the UPA. One can argue that the UPA’s growth rate achievements were unrelated to anything it did in terms of good policy-making, but that is a different argument altogether. Similarly, in a growing economy, stock market indices should broadly trend upwards in the medium term – so any higher peak does not constitute a new achievement. If the Congress is foolish enough to claim that Rs. 70 to the dollar is the NDA’s dubious achievement, the NDA can counter-claim that the Sensex at 38,000-plus – its highest peak in 70- years – is a good achievement of its own. To repeat: the only way to judge economic performance is the rate of change, and in this the UPA took the cake on exchange rate depreciation. From a mid-2010 high of around Rs. 44 to the low of Rs. 68 (numbers rounded off), the UPA managed to depreciate the rupee by 35 per cent in four years. Calculating from the rupee’s peak of Rs 58 in the early months of the National Democratic Alliance (NDA) regime in 2014 and the current low of around Rs. 70, the rupee depreciated by less than 18 per cent under Modi.