Sunday, June 24, 2007

Why keep the Rupee down?

Thanks to huge inward remittances of dollars, there is pressure on Rupee to appreciate. RBI has been trying to control this appreciation by buying dollars from the market. This in turn is creating inflationary pressure. The reason RBI doesn't want a stronger rupee is that it is bad for exporters. Everyone seems to take it for granted that a stronger rupee is bad for exporters. But, does it have to be so?

Let's take the IT industry. Let's say rupee goes from 40 a dollar to 30 a dollar. It doesn't mean the IT services companies have "lose their competitiveness". They can keep the billing rate at the current levels and still make profit - by cutting costs. Reduce salaries to account for the rising Rupee - other costs like travel etc will go down anyway as they are linked to dollar rate. A 20-30% reduction in salary for IT folks only means they are back to last year's salary levels in rupee terms - hardly makes a dent. Especially, if rupee is at 30 a dollar, petrol and all other imports will be much cheaper bringing down inflation - so your salary may be lower numerically, but in terms of purchasing power you are no worse off.

So, why not let the rupee appreciate to its true value? Why keep it artificially down in the process taxing all the citizens in the form of higher inflation?

Update: A ToI article supports the view with this sentence: "But many feel the focus has to be on cost control, and especially salary cost, which is by far the biggest component — about 40 per cent of total cost."


M O H A N said...

Dear dear... IT salaries even in top companies dont raise 30% s maximum 15%.

Already that industry is hit by lack of trained people and this salary cut will induce more to leave shores...back to square one!

Mohan said...

M O H A N: Your salary will remain the same in dollar terms - so there is no change in relative attractiveness of overseas jobs. As for domestic, even if IT salaries get cut in half there is no other sector which can match that salary, so there is no fear of people quitting en masse.

Point is, there are ways for IT industry to remain competitive and profitable without keeping rupee artificially low and thereby taxing all the citizens of the country in the form of inflation.

M O H A N said...

Who is talking of IT salary in $ terms, the domestic industry is what my focus is...I will leave it to PC.

Have been in the IT industry for more than 21 years, there has been perrinial shortage of manpower in this sector - this shortage creates hikes in salary to match the american/european levels directly.

Inflation is just not due to IT salaries sir... a raise in Crude brent for 1 USD or 40Rupees improves inflation by 1% as studies have shown..

Inflation at 3% is good for economy and IT industy is not the only sector contributing to this.

Mohan said...

M O H A N: I am very well aware of shortage of manpower in IT. But that is due to lack of skilled workers, not because other industries are gobbling up people who can work in IT. There is no industry in India to match IT salary and that will remain so even if IT salaries get cut in half.

As for inflation, I am not saying that IT salaries are contributing to inflation. What is contributing to inflation is RBI buying dollars in order to keep the rupee value artificially down. All I am saying is, let rupee appreciate to whatever level. There are ways for IT and other export industries to remain competitive even if rupee goes to 30 a dollar.

W.T.F said...

Inflation is at it's lowest level in four years.

Anonymous said...

mohan vs. m o h a n:

nice - i just saw this article (came via your comment at sujatha's - you have been dormant for some time now, mohan) and was about to forward to the mohan (with spaces) ;-).

my contribution to the debate - i don't think it folks will go with a pay cut, whatever be the reason. no way, no how!

- s.b.

Mohan said...

s.b: since I made that post, following things have happened: Narayana Murthy has said instead of worrying about rupee appreciation, which is a macro economic phenomenon, companies should focus on increasing productivity and managing costs. If rupee does end up appreciating by 40-50% as I hope, then there is only so much productivity improvement you can do to offset it and they will be left with no other option than to cut costs (read salaries).

Other thing that has happened is ToI reported that some companies are considering having 6-day week to offset rupee rise. More work for same pay is nothing but salary cut in an indirect way.