Monday, June 17, 2013

Fall of the Indian Rupee

A report appeared recently of a Reserve Bank of India (RBI) study about the share in circulation of various currency denominations in 2010-11. The study effectively reflects how the value of the country’s currency unit, the Rupee, has gradually eroded. The erosion seems to have picked up pace since the economic reforms process began in 1990-91 and was, seemingly, accentuated since 2003-04.

The study has revealed that in 2010-11 the share of Rs. 500 denomination bank notes “has gained significance and accounted for 47 per cent of the total currency in circulation”. These quickly emerged as the second most important denomination since 1998-99 and soon became most important denomination in 2003-04 replacing Rs 100 denomination. The report further indicated that the Rs. 100 bank notes which had a significant presence in circulation even after introduction of the Rs. 500 note lost their second position after introduction of the Rs.1000 bank notes in 2007-08 that came to account for 27 per cent of the total currency in circulation. Accounting for close to 50 per cent of the value of the total currency in circulation from 1970s to 1990s, the share of Rs 100 steeply declined to 14.8 per cent in 2010-11. 

Going progressively back in time, the study has traced the changes that occurred in circulation reflecting the emerging usage pattern of currency notes of various denominations since 1970s. It also reflects changes in the state of the economy over the last few decades. Rise in prices of goods and services is a problem that has been stalking the country since independence. In almost every speech since independence prominent national leaders talked of fighting this, what they called, “monster” and yet they could never put a leash on it. The prices kept moving northwards and simultaneously the smaller denominations, rendered valueless, kept falling by the way side.

During the “license-permit raj”, with the so-called Hindu Rate of Growth of 3 to 3.5 per cent there used to be incremental price rises barring the sporadic bouts of high rate of inflation. The currency did lose its value but the process was gradual except during years of extraordinary stress on the economy. However, with the opening up and liberalisation of the economy in the 1990s the fall in value of the rupee gathered momentum and it picked up pace in tandem, as it seemed, with the rise in the rate of growth. The decline in the rate of growth during economic slowdown since 2008 has surprisingly failed to arrest the Rupee’s depreciation.

All this is amply illustrated by the RBI study. Between 1970s and 1990s Rupees 100 notes occupied a position of significance accounting for almost 50 percent of the currency in circulation as against around 14 percent in 2010-11. Likewise the share of Rupees 10 currency notes that was pretty high before the 1970s and was around 34 percent during the decades of 1970s and 1990s progressively declined and came down to only 2 percent in 2010-11. As we all know, there has been enormous shrinkage in its value. Whereas at one time, especially during 1950s and 1960s, Rupees 10/- commanded appreciable purchasing power its value today is, perhaps not even like that of a Rupee of those times.

The study also revealed that the currency note of Rupees 20 denomination that was introduced to supplement Rupees 10 currency notes remained important only until 1982-83 and constituted 8 percent of the notes in circulation. However, it lost whatever little significance it had by 2010-11 when it accounted for only 0.6 percent of the notes in circulation. Similarly, the Rupees 50 denomination currency note, introduced 
presumably to reduce usage of Rupees 10 and 20 notes, became second most important denomination in 1980 and 1990s. While in 1992-93 it accounted for 32 percent of the currency in circulation its importance declined in 2010-11 to an utterly insignificant position of 1.7 percent.
The study has not dealt with the coins that used to be or are in use. Perhaps, it was confined to the circulation of currency notes of Rupees 10 and above. No mention has been made in the report of the currency notes of Rupee 1 and Rupees 2 and 5. Perhaps these are no longer being printed having been substituted by coins. While notes of Rupee 1 and 2 have disappeared from circulation one occasionally comes across heavily soiled Rupees 5 notes. Coins of fractions of a Rupee have long since disappeared. A cost benefit analysis led to discontinuance of minting of 1, 2, 3, 5 and 10 paise coins, eventually ceasing to be legal tender along with those of 25 paise in 2011. Though the coin of half a rupee, that of 50 paise, continues to be legal tender, it is not seen any more, having lost practically all its value. Small change has just vanished from the markets. Today’s small change is constituted by the coins of Rupees 1, 2 and 5. The recently introduced coins of Rupees 10 are not yet quite visible.

Empirical studies generally reflect accurately the situation on the ground. Those of us who spent our adult life in post-independence years know how over the years the Rupee saw its value being pared down. Gone are those days of 1950s and 1960s when a seer (approximately a kilo) of grains – rice or wheat – and lentils would be available for 10 to 12 annas, from half to three quarters of a rupee and a kilo of mutton for a like amount. In those far-away days fractions of a rupee had value. One could have a meal in less than a rupee. halwai (confectioner) would sell a paav (quarter seer) of puris  (about 8 puris) in 10 annas with a substantial plate of vegetables (aloo tamatar or aloo matar) on the house. I recall having had a meal off an eating joint in Agra in early 1950s in four annas comprising four chapattis with free daal, sabzi (lentils, vegetables) and delicious pickled mixed vegetables. For breakfast in a restaurant near St. John’s College we used to get an omelette of 2 eggs and 2 buttered toasts for 6 annas.
Our next door

Being packed with value, Rupees 1, 2 and 10 were very precious. Incomes were by and large low and so was consumption and hence what circulated more were the coins and currency of lower denominations. Even the then prestigious Civil Services commenced with only three-figure salaries, slowly progressing to four figures and retiring off officers when they came close to five figures. Today, with the steep fall in the Rupee’s value the pension of the same officers is in five figures.

The prospects for the Rupee do not seem very bright, what with adverse trade balance, high current account and fiscal deficits, mounting external debts, slowing economic growth and current political instability. In addition, with large scale political and bureaucratic corruption involving mindboggling sums enormous amounts of unaccounted wealth is floating around in the system pushing the demand that a weak supply network is not able to meet. The consequential inflationary pressure on the economy is most likely to further weaken the Rupee. Sinking to 57 to a dollar is a sign of weakening of the Rupee which, none would believe, was equivalent to a dollar in not-too-distant 1947.

From the way the things are going soon the RBI might find that Rs. 500 currency notes have been displaced from their prime position by Rupees 1000 notes.

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