Finance Minister Nirmala Sitharaman’s recent statement on the rising value of the US dollar, as opposed to the declining Indian rupee, has resulted in a political kerfuffle. By the time the opposition was done mocking the finance minister, Sitharaman’s remarks had already made their way to the meme-verse. While India’s fascination with an overvalued rupee begs any economic logic, it raises an often-overlooked question: What is the source of this fascination with the value of a mere currency?
After all, the country is just coming out of a pandemic, following almost a decade of sluggish growth. One would expect that the opposition would use their platform to target the government about more long-term employment prospects or wage growth, as opposed to a mundane exchange rate? Obviously, this political fascination with the rupee’s value is not new. Congress has spent a lot of time highlighting Prime Minister Narendra Modi’s tweets and speeches from 2013, where he persistently targeted the United Progressive Alliance (UPA) government for a dwindling rupee.
Interestingly, back in 2013, then-Finance Minister P. Chidambaram had responded to Modi’s criticisms by highlighting how under former Prime Minister Atal Bihari Vajpayee, the rupee depreciated from 39.49 in March 1998 to 45.33 on May 21, 2004. Understandably, Chidambaram was responding to a political statement at the height of an electoral campaign, but still, this is the finance minister who was a key architect of India’s response to the 2008 global recession.
Story of an overvalued currency
India’s obsession with the rupee’s value has its roots in the colonial era and in a post-independence socialist economy. Four interrelated narratives have shaped how the country’s citizenry has come to view its exchange rate.
First, during colonial rule, the British maintained an overvalued rupee, which essentially served London’s interests but had detrimental effects on the Indian economy—especially its prospects for industrialisation. “Devaluation would have increased various India-related sterling expenditures within Britain. The rising value of the rupee created deflation within India and encouraged repatriation of profits by British Indian firms. Both of these hurt industrialization, the former indirectly by curtailing demand, and the latter directly by reducing investment,” writes author and international affairs professor Atul Kohli.
The Indian industry was a major opponent of an overvalued rupee. Another rising Indian economist dedicated his doctoral thesis to how an overvalued exchange rate was hurting Indian business interests. This was Dr Bhimrao Ambedkar, who spent a good part of his dissertation arguing against British economist John Maynard Keynes’ defence of the rupee’s exchange rate and the overarching monetary regime. “This difference proceeds from the fundamental fact, which seems to be quite overlooked by Professor Keynes, that nothing will stabilize the rupee unless we stabilize its general purchasing power,” writes Ambedkar in the preface of his dissertation.
Yet another supporter of devaluing the Indian currency back then, was the Indian National Congress. They sided with Indian business interests. But London never really budged, and India continued to feature an overvalued exchange rate.
From here began India’s obsession with an overvalued exchange rate. A little anecdote helps highlight how this obsession had taken root by the time the British left the subcontinent. In The Story of the Reserve Bank of India, economist Rahul Bajoria recounts an incident from 1948. Following some misunderstandings, the RBI made a premature exit from the Pakistani economy. However, a few months later, London devalued the sterling, forcing both India and Pakistan to devalue, as their currencies were pegged to the pound. But Pakistan refused to devalue. Eventually, India established an exchange rate vis-à-vis Pakistan – 100 Pakistani rupees for 144 Indian rupees.
Across the two countries, an overvalued currency was seen as a matter of international prestige. It is just that back then, the RBI had a much longer institutional history as opposed to the Pakistani central bank, which helped the former do the needful.
Ardent support for overvaluation
Second, as India moved into a planned economy, by the late 1950s it had decided to double down on its ideas of severe import substitution. The architect of this policy was then-Finance Minister T.T. Krishnamachari, who was an ardent supporter of overvalued exchange rates. By 1965, India had severely exhausted its foreign reserves, and the trio of the World Bank, the International Monetary Fund (IMF) and the US government told New Delhi that any future assistance would be conditioned on a rupee devaluation.
Krishnamachari opposed this. In an infamous radio address on 18 July 1965, he argued that devaluation was “not an answer” to India’s economic woes, and it would only exacerbate the country’s long-term exchange rate problems by slowing down import substitution industrialisation.
While Krishnamachari was soon sacked by then-Prime Minister Lal Bahadur Shastri, he represented an important strain of supporters of an overvalued rupee. Their logic was seemingly more economic, but it was underpinned by a fundamental political choice: A preference for import substitution.
Devaluation akin to loss of power, status
Third, and perhaps the most significant narrative that buttresses the Indian population’s view on its currency was a function of the anti-imperialist understanding of the US-led global economy in the post-World War II era. According to this view, the global economy was hierarchical, and the value of one’s currency denoted its position in that hierarchy. Consequently, being ‘pressurised’ to devalue by US-led international institutions was a sign of coercion, and India’s acceptance of a subordinate position. The most ardent proponents of this view were the Indian left.
In 1966, former Prime Minister Indira Gandhi finally decided to devalue the rupee. A few days before the announcement, when she consulted her cabinet, Indira was met with fierce opposition. For instance, K. Kamaraj was so furious that he insisted that the working committee or Parliamentary board be consulted before a decision is made. However, no opposition was as severe as the one by Communists.
Following the devaluation, the pro-Communist Party of India weekly magazine, The Link, denounced the decision as a “craven surrender” to the US. “Devaluation of the rupee under American pressure is the end of one chapter of our economic effort and the beginning of another,” it noted. “Devaluation of the rupee is the final admission by an abject administration that it has not got enough belief in itself to go to the people and make them work for their independence.”
Arguably, this idea of the value of a currency denoting a country’s position in a Western-led global order has been one of the most enduring legacies of the pre-liberalisation era.
Dependence on overvalued currency
Fourth, while the Left opposed currency devaluation owing to its anti-US ideology, a large part of the Indian business interests at the time opposed it because of their own economic considerations. In a near-autarkic economy, entrepreneurial interests would find the value of their foreign obligations rise substantially following a devaluation. Today, the Swatantra party is seen as a major proponent of alternative economic thinking in the Nehruvian era, but given that it represented business interests in the 1960s, it staunchly opposed the 1966 devaluation.
The dependency of the Indian entrepreneurial class on an overvalued currency persisted well into the early 1990s. In May 1990s, when Montek Singh Ahluwalia, then-special secretary to the PM, wrote the famous ‘M Paper’ under a pseudonym, he argued, “It may be noted that while Indian industry (and the Industry Ministry) is usually enthusiastic about reducing customs duties, it is not supportive of either an increase in excise duties or an offsetting depreciation in the exchange rate! Both measures will help exporters, but non-exporting industry will feel the pinch.”
Eventually, India liberalised its foreign exchange rate through the 1990s, and by the early 2000s, almost all currency controls had been done away with. And yet, over the past two decades, the rupee and its exchange value got politicised. However, the contours within which this politicisation took place were formulated in the pre-liberalisation era. The enduring legacy of that period has been to elevate the rupee as an unnecessary symbol of India’s global status. As India’s post-1991 political economy keeps reminding us: Getting rid of old policies is much easier than the socio-political legacies those policies might have unleashed.
Srijan Shukla studies international politics and business at New York University (NYU) and is managing editor of NYU’s Journal of Political Inquiry. He tweets @srijshukla. Views are personal.
(Edited by Zoya Bhatti)