The rupee is declining against the dollar, and the political leadership is struggling to find a solution to that. It is a complex issue because it is conditioned by the pulls and pressures of the international political economy. The US Federal Reserve has hiked interest rate in the money market, which has pushed up the value of the dollar. The value of India’s imports has also increased due to the rise in crude oil prices in the world market.
The government, on the one hand, is under pressure to reduce fuel prices and, on the other, it has to control further depreciation of the rupee. This is a tricky situation since the foreign exchange market and oil are both completely unregulated in India. The market forces, among other factors, primarily constitutes the collective demand and supply of goods and services provided by the people, for the people and of the people, and determines prices in a free market.
Clearly, excessive reliance on the central bank and other institutions may not help the economy to retrieve the rupee from its downward slide. Instead, the people should take inspiration from the pre-Independence ‘Swadeshi’ movement, when all Indians decided to use indigenously made goods and boycott British goods.
Such people-driven initiatives are required to reduce the excessive demand for oil, which would lower the import bill. The greater the demand for any product, the higher its price rises, whether it’s the Greenback or Black Gold. That’s the bind the economy is caught in today. In October, the government reduced the price of petrol by Rs 2.5, which would definitely increase demand for oil and lead to higher imports.
In turn, the rupee would fall when too much of it is pumped into the foreign exchange market. American economist Greg Mankiw favours increasing fuel tax to reduce the demand for oil and thereby reduce the value of imports. It also lowers US dependence for oil on the Organisation of Petroleum Exporting Countries (OPEC).
With a 1.37 billion population, India has the clout to manipulate the international political economy to promote its national interest through a ‘Petrol Substitution Movement’ which has the potential to determine oil prices and influence the foreign exchange market. So, initiatives like car-pooling, walking that extra mile, work from home wherever and whenever possible and use of fuel-efficient vehicles are some ways to curtail oil consumption. In turn, this will help to lower fuel prices while shoring up the rupee.
Moreover, the ‘Petrol Substitution Movement’ could contribute to control cost-push inflation through a reduction in input prices as oil is one of the major inputs for the manufacturing sector. Reduction in inflation rate will also have a positive effect on the Current Account of Balance of Payment.
The price of Indian exports would become relatively cheaper for foreign importers, which in turn would increase the demand for Indian products in overseas markets. Also, domestic consumers will find imports costlier compared to Indian goods and services, which would bring down expenditure on imports. The increase in revenue receipts through exports and decrease in the import expenditure would lessen the Current Account Deficit.
If the people consume less fossil fuel through the use of alternative energy sources, it would translate into a reduction in the demand for fuel, which would automatically lower fuel prices in the country. The lesser the demand for petrol would reduce oil imports from the OPEC which in turn would shrink the supply of rupees into foreign exchange market.
It also reduces the demand for dollars and other foreign currencies against the rupee. Since the market is free from any intervention, its forces will hike the rupee value in the foreign exchange market. It would also help the government to take efficient decisions for the Indian economy rather than adopt politically motivated decisions for the sake of vote-banks.
The central and state governments can also help to promote such societal initiatives through provision of better quality public transport with proper connectivity across cities. Similarly, private sector companies could contribute their mite to this social movement through changes in dress codes from formal wear to permit casual or sports clothes which would motivate their executives to switch to bicycles from their air-conditioned cars.
Apart from an economic report card, such societal initiatives would also reduce vehicular traffic and attendant pollution. It has the potential to step towards sustainable development and curb the depletion of natural resources.
The mega size of the country’s population gives it leverage to assert its clout over the international political economy. The political leadership needs to be aware that the
population, which is a bane in many respects, could also be a boon in terms of greater consumption and more human resources to work in agriculture and industry.
(The writer is an Assistant Professor of Economics at CHRIST University, Bengaluru)