After several decades of continuous decline, the rupee has started to stabilise in the year 2023-24, especially, in its third and fourth quarters. It is worth noting that in the first two quarters of the year 2023-24, the rupee depreciated by only 1.0 percent against the dollar. But in the last two quarters of this financial year, the rupee-dollar exchange rate stabilised at around Rs 83.0 per dollar.
We see that the value of the rupee has been continuously falling since the 1980s, since our country moved from the administered exchange rate system to the market determined exchange rate. It is worth mentioning that the rupee-dollar exchange rate moved from Rs 9.46 per US dollar in 1982 to Rs 82.17 per US dollar on March 31, 2023. This means that from 1982 to March 2023, the rupee has depreciated by 868.6 percent, at the rate of 5.41 percent per annum in the last 41 years. This has happened due to the rapidly increasing imports in the country, with exports growing at a much slower pace.
Current Account: No More In Deficit
This year, we witnessed a significant increase in exports of goods and services. The current account deficit has narrowed to just $28 billion in the first three quarters of FY23-24, which is less than 1 percent of India’s GDP. This deficit has turned into a surplus in the first two months of the fourth quarter, riding on shrinking deficit on merchandise trade and widening surplus on services trade. If this trend continues, the current account deficit for the full year could shrink to around $30, which could be much less than 1 percent of GDP, much lower than the current account deficit of FY23 ($66 billion, nearly 2 percent of GDP).
Foreign direct investment, though slightly lower in the first three quarters of FY24, compared to corresponding period in 2022-23, is more than offset by an increase in remittances from people of Indian origin. Similarly, despite rising unemployment in the US and Europe, remittances from Indian-origin people continued to rise unabated, and are expected to reach $135 billion in 2023-24 compared to $125 billion in 2022-23.
Dollar facing challenges
Due to the attraction towards the dollar it has continuously strengthened against other currencies of the world, especially the currencies of developing countries. In India, where in 1964 one dollar was equal to only Rs 4.66, now it has reached about Rs 83.38 per US dollar. Perhaps that is why all the countries of the world had continued keeping the dollar as a reserve currency and making most of their international payments in dollars. Due to this increasing demand for the dollar, the dollar continued to strengthen year after year. Although the share of the US dollar as an international reserve currency, has decreased from 70 percent in the year 2000 to only 58 percent now, yet the US Federal Reserve claims that the US dollar remains the most preferred currency globally. But dollar's popularity is continuously declining.
Clear signs of dedollarisation
We see that most countries are slowly, but surely moving away from dollar trade. Instead, they want to settle trade in their own currencies. For example, India is promoting a rupee-trade mechanism for trade settlement for the first time; and about 20 countries, including Singapore, UK, Malaysia, Indonesia, Hong Kong, UAE, Kuwait, Oman, Qatar, among others, have agreed to go along, and opened vostro accounts to facilitate international settlement in rupees. China is also pushing for trade settlement in its currency. These alternative trade settlement mechanisms are slowly gaining momentum. Though the share of the dollar is still high at 58 percent, the shift is clear and noticeable.
The dominance of the US dollar and the compulsion to hold large amounts of US dollars for trade settlement has not been very auspicious for the world in general and developing countries in particular. The volatility of the US dollar on the one hand and the compulsion to hold dollar reserves on the other, have hurt them. The elimination of the US dollar requirement for crude oil imports reflects the ongoing global trend towards de-dollarisation and increased use of national currencies in inter-country trade.
Policy of Aatmanirbhar Bharat
It is worth noting that for the last more than 3 decades, imports in the country have increased rapidly, while exports have not increased enough. In the absence of increasing incomes and overall development in the country, imports in the country continued to increase and exports did not increase enough, this became a major reason for the devaluation of the rupee in the country. But in the year 2021, learning from the Coronavirus pandemic, India has started moving rapidly on the path of self-reliance. Through PLI i.e. production-linked incentives, under the policy of Aatmanirbhar Bharat, efforts are now being made to revive all those industries which were closed due to unequal foreign competition. In view of all these efforts, an unprecedented increase in investment is being seen in almost all the sectors promoted by the government. Due to all this, while on the one hand imports will be curbed, exports will also get a boost. This will reduce India's trade deficit and balance of payments deficit, both. Some offshoots of the same are seen in the past year, and the trend is expected to continue.
Ashwani Mahajan is a professor at PGDAV College, University of Delhi, and the national co-convener of the Swadeshi Jagran Manch. Views are personal and do not represent the stand of this publication.
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