Political currency or divine help?

Economic debates should be informed. Changing the currency notes or printing images of Lord Ganesh and Goddess Lakshmi on them will not help

The Union government is facing significant criticism because of the falling rupee. It has depreciated over 10 per cent against the dollar since the beginning of the year. Delhi Chief Minister Arvind Kejriwal added another unwarranted angle to the economic debate this week by suggesting that images of Lord Ganesh and Goddess Lakshmi be printed on currency notes to improve well-being in the country. This is problematic and has been said with narrow political objectives. India is a secular republic, not a Hindu state. This is also worrying because political discourse seems to have shifted to a point where everything is seen through the prism of religion. This is a slippery slope and must be avoided. Political parties in general are expected to have a more informed debate on economic management. Changing the currency notes or pictures on them will not help.

Generally, political debates on the currency are focused on its nominal value against the dollar, which should also be avoided. Directly relating the nominal strength of the currency to the economy has resulted in a systemic bias for a stronger rupee. All political parties have adopted the same approach, depending on their position in Parliament. There are a variety of reasons why the rupee has been under pressure and most of them are not in India’s control at the moment. It is important to recognise that India imports most of the crude oil it needs, and higher prices affect its external position. Since oil prices are on the higher side and are expected to remain so in the foreseeable future, India’s current account deficit will remain elevated, putting pressure on the rupee.
 

Aside from the oil and trade factors, there are other issues affecting currency movements at this stage. The dollar is strengthening, which has resulted in a fall in most currencies, including hard currencies like the euro, yen, and pound. In fact, the rupee had fallen less than a number of currencies, partly because of interventions by the Reserve Bank of India (RBI). Since the US central bank is tightening monetary conditions at a faster pace than most central banks, capital is flowing to the US. Indian markets have also witnessed an outflow of over $24 billion so far this year. Therefore, since both importers and foreign investors are demanding more dollars, its value compared to the domestic currency is increasing. As the US Federal Reserve is likely to keep increasing rates, the pressure on the rupee is likely to continue.

It is worth recognising that depreciation in the currency is actually necessary. Not allowing the rupee to fall when all other currencies are depreciating would affect India’s external competitiveness. A stronger currency would benefit consumers and hurt producers. Also, it is difficult for a country dependent on capital flows to defend its currency in such an environment. It could end up creating bigger imbalances and financial stability risks. The foreign currency reserves accumulated by the central bank should be used judiciously to contain excess volatility as is the stated position of the RBI. Overall, therefore, it is important that political debates about the economy are informed and do not put unnecessary pressure on institutions. Debates should focus on attaining higher growth with a balanced budget and lower inflation. This would help ensure stability and prosperity in the long run.