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HomeOpinionTo stop rupee dive, India needs to move labour away from agriculture

To stop rupee dive, India needs to move labour away from agriculture

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Almost any movement of labour to non-agricultural activity — like construction or serving tourists — will translate into productivity gain.

Economic theory tells us that a country’s currency becomes more expensive (i.e., it rises relative to other currencies) as its productivity level rises relative to others. The reason has to do with goods and services that can be traded internationally, like cars, as against those that can’t, like hair-cuts. As productivity (i.e., car output per employee) goes up at Maruti, the price of a hair-cut will go up by more than the price of a car — since a barber cannot improve his productivity (hair-cuts per year) in the way that a car company can through automation. This explains why hair-cuts cost more in higher-income (i.e., higher-productivity) countries like the US than they do in India.

Currencies move up and down also for reasons other than productivity — like relative inflation rates, resource inputs and an economy’s attractiveness to foreign capital. If inflation rates are high, or capital is flowing out instead of coming in, or if trade shows a large deficit, then that country’s currency will lose value. In general, therefore, a better-managed economy will see its currency gaining strength, while poorly-managed ones will see the opposite. Over the last decade, for instance, the worst-performing currencies have been those of crisis-ridden countries like Argentina, Turkey and Russia. Brazil hasn’t done too well, either.


Also read: GDP growth of 8.2% surpasses expectations, but agriculture prices a cause of concern


From that perspective, how well or badly has India been doing? In the Asian context, not very well. While the rupee’s value has seen little change over a decade relative to the Sri Lankan or Pakistani rupee (and Pakistan is no one’s idea of a well-managed economy), it has lost value against all other major Asian currencies, including that of Bangladesh and of course China. A decade ago, a Bangladeshi taka fetched only 69 Indian paise, now it fetches 86 paise. Whether it is the Philippine peso, the Malaysian ringgit or the Thai baht, or for that matter the Vietnamese dong, the rupee has lost relative value to varying degrees since 2008. The rupee’s relative decline would have been smaller if the comparisons had been made before its recent fall, but decline would have registered even then.

A picture of TN Ninan, chairman of Business Standard Private LimitedThe scope for gains in productivity is greater in an emerging market than in a developed economy (because of the possibility of catch-up), so a well-ordered emerging market should see its currency gaining not just against other emerging economies but also against those of the developed economies. And so it is that the Thai baht has gained significantly against both the dollar and the euro over the past decade, while the Chinese yuan has kept pace with a strong dollar. The ringgit has kept pace with the euro, while the Philippine peso has gained ground against Europe’s currency. In clear contrast, the rupee has lost significant ground against both the world’s major currencies.

Why should this be the case when the Indian economy has been growing faster than these economies, other than China? One explanation could be that most “tradeables” (manufacturing and agriculture) have not been doing quite so well. Another is that economic growth flows from several factors, including population growth, and does not necessarily imply “factor” productivity growth as well. Thus, close to half the Indian workforce is still engaged in the least productive of virtually all activities, farming — where incomes in India are only a sixth of the incomes in non-farming activities. Further, much of India’s exports continue to be from sectors where low labour costs are a major competitive advantage — as in diamond cutting and garments. In comparison, China has moved from toys and garments to higher-value added activities like making robots and specialty materials.


Also readThe Modi govt should be pleased with the IMF report on Indian economy


It goes without saying that what India needs at its present stage of development is more labour-intensive activity outside of agriculture, so as to absorb surplus labour from agriculture. Almost any movement of labour from it to non-agricultural activity (like the construction trades, or serving tourists) will translate into productivity gain. The test of whether such transitions are taking place fast enough will show in what happens to the rupee over the next few years.

By Special Arrangement with Business Standard.

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6 COMMENTS

  1. What happens to Farm Sector?

    Our economy is agrarian economy, we won’t have people to produce food. Are we saying machines will take care of cultivation? Who will address agricultural unemployment?

    The thought of the writer seems ill prepared and expressed in a jiffy…

    I am open for discussion….

  2. Th real reason are the following,namely Indian Leaders work for a strong US Dollar:-
    1.The 2 Gold Schemes of the NDA is for Indirect Gold COntrol and thus prevents Indians from preserving their wealth,if any.Gold is inverse of US Dollar.
    2.the huge US treasury Holdings of US Dollars 147 Billion makes the Rupee weaker and the US Dollar stronger.
    3.The huge Forex of US Dollars 410 Billion.Result ditto item 2 above,plus making other Currencies which make the Basket stronger.
    Remedy:-
    1.cancel the 2 Gold schemes by the NDA and thus prevent the US Dollar becoming stronger viz-a-viz the Rupee
    2.Reduce the US Treasury and Forex Holdings by about US Dollars, 120 Billion and 100 Billion respectively.
    One is surprised by Author;s unfounded claims and forced to doubt his knowledge as regards Finance and Economy..

  3. No Indian politician has the guts to flip the bird against agriculture. Everyone thinks that there will be no food on the plate if farming is affected. What such people fail to understand is that there will be food coming in from different places where it is efficient and we can pay for the food from the money we earn in sectors where we are efficient and profitable.

  4. Niti Ayog has also been saying this for the lst many years,at least from the Panagrahiya times.The aim is:-
    1.A Globalist idea,that is the Oligarchs are preferred.
    2.Land Grab.
    3.Create Trauma among the many villagers,by shattering their roots.This results in “LESS UNITY”,as people coannected by generations move away,losing contact,which makes them weaker.This suits the Globalists.
    4.The villagers who move away will resort to crimes and other means[you know what I mean] for a living.Many may land up in Jails.This will REDUCE POPULATION,as POVERTY and imprisonment reduces population.
    5.Farmers invest in Gold,but the Globalists want the money in Stocks and Banks,keeping the US Dollar strong.Gold inverse to the US Dollar.
    6.The idea will increase Industrialization,which GUZZLES WATER which adversely affects the Agri-Sector.farmers top Agriculture and sell Land,the so-called Desperate sale.
    7.Land Acquisition is the Major problem for the Oligarchs.hence this idea suits them fine.

  5. Niti Ayog has also been saying this for the lst many years,at least from the Panagrahiya times.The aim is:-
    1.A Globalist idea,that is the Oligarchs are preferred.
    2.Land Grab.
    3.Create Trauma among the many villagers,by shattering their roots.This results in “LESS UNITY”,as people coannected by generations move away,losing contact,which makes them weaker.This suits the Globalists.
    4.The villagers who move away will resort to crimes and other means[you know what I mean] for a living.Many may land up in Jails.This will REDUCE POPULATION,as POVERTY and imprisonment reduces population.
    5.Farmers invest in Gold,but the Globalists want the money in Stocks and Banks,keeping the US Dollar strong.Gold inverse to the US Dollar.
    6.The idea will increase Industrialization,which GUZZLES WATER which adversely affects the Agri-Sector.farmers top Agriculture and sell Land,the so-called Desperate sale.
    7.Land Acquisition is the Major problem for the Oligarchs.hence this idea suits them fine.
    8.Land is an investment and its value will rise in Future.Good for the Oligarchs to own HUGE Land Bank.
    Long story short Land Acquisition is behind this idea of the vested interest at the cost of the farmers.

  6. Movement of labour to non-agricultural activity may bring productivity gain, but people will face shortage of food grain in the long run. Development strategy in India like countries cannot ignore agriculture.
    The need is that we need to improve the production capability in all aspects including agricultural and other industrial activities. Government should restrict production of unusufull things in the interest of future generation.

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