FALL OF RUPEE: IMPACT ON COMMON
MAN AND THE IT INDUSTRY
With
the depreciation of a currency, the cost of living essentially goes up in that
country or region(s) substantially; for the simple reasons that, more money has
to be paid for the imports and the exports will fetch lesser returns than
before, with a falling currency. Its GDP[1] is
greatly influenced. Its EXIM (Export-Import) on goods and services that
reflects its economic health gets adversely affected by the depreciating
currency, because exchange rates impact the manufacturing/production costs of
products and indirectly their prices as well.
The
Rupee Vs Dollar issue has been a cause of concern for the common man more than
the IT companies relatively. Whenever the rupee depreciates, any effort by our
central bank (the RBI) to control the slide, results in a higher inflation. In
fact, with dollar being the reserve currency of the world, the United States
intelligently transfers inflation to other countries. A higher inflation
impacts the lives of the common man impacting his day to day activities
vividly. In contrast, with the depreciating rupee (as against the dollar), the
exports tend to increase, even though the margins are lesser than before.
India’s IT industry is the highest exporter of software products and services
and the falling rupee helps that part of the IT industry that works on dollar
based transactions in presenting positive quarterly results and an impressive
balance sheets. On the other hand, the other part of the IT industry that
services Indian firms and deals in rupees will be impacted by the ensuing high
Inflation. So the impact is of mixed type.
Whenever the rupee depreciates against the dollar,
the following phenomena are common. A higher demand for dollar due to lesser
availability; a reduced demand for the rupee due to its easy availability (a
heated economic situation); infusion of more dollars into the market by RBI to
stem the slide, results in the reduction of FOREX reserves which is dollars; a
higher infusion of dollars into the market by external investors (investors
from outside the country) there by further depreciating the rupee. Any effort to fix the above phenomena, almost
always results in a higher inflation.
Through macroeconomic studies, the behavior of an
economy as a whole can be studied effectively. Macroeconomic theories relate
the phenomena of GDP, unemployment, and inflation. From a macroeconomic point
of view any volatility in exchange rates (for ex. rupee Vs dollar) can
drastically impact these macroeconomic parameters as discussed below.
From the perspective of a common man:
The original version of Okun's law[2]
states that a 3% increase in the nation’s total production would lead to a 1%
decrease in unemployment. When there is inflation, it affects the common man in
terms of his purchasing power. Prices will increase and with increase in prices
people will find living tough as their disposable incomes reduce. The problems
of a wage-price spiral – price rises can lead to higher wage demands as workers
try to maintain their real standard of living. Higher wages over and above any gains
in labor productivity causes an increase in unit labor costs. To maintain their
profit margins prices are increased. The process could start all over again and
inflation may get out of control. In a theoretical world, a 2% wage increase
during a year with 4% inflation has the same net effect to the worker as a 2%
wage reduction in periods of zero inflation.
Depreciation of the rupee as against the
dollar directly impacts the remuneration, the various loans and interest rates,
the monthly grocery bill, the cost of luxury goods like Cars, Smartphones etc
the vacation expenditures, the dining cost and last but not the least, the
increased surcharges and taxes on various fuels like Petrol, Diesel, Kerosene,
LPG etc. With a major dependency on imports for its energy needs, the Indian
government is forced to increase the prices of fuel, also increasing surcharges
on the fuel to fund its governance and the various development programs. The
depreciation of the rupee has considerably affected the price of the edible oil
in a big way, as we import nearly 60-70% of our requirement. FMCG, or Fast
Moving Consumer Goods, such as soaps, detergents, deodorants and shampoos, of
which crude oil is an input, are more likely to become more expensive. High raw
material costs (since most of it are imported paying more rupees than before)
will result in a higher retail prices for the common man.
The investment towards foreign education
will be impacted directly with a depreciating rupee. One has to spend more
rupees to send the same amount of dollar’s to their sons/daughters. The
education loans also tend to become costlier. When the cost is in dollars and
the borrowing is in rupees, students may fall short of funds as the loan may be
based on the initial loan agreements. Vacations abroad have become costlier too
for the same reason.
Property costs have gone up because of a
depreciating rupee. Due to heavy inflow from NRIs to invest on properties (with
dollar fetching more rupees), the increased demand has lead to increased
property prices. Inflation can also cause a reduction in the real value of
savings - especially if real interest rates are negative[3].
Many pensioners who are on fixed pensions will find it impossible to handle the
effects on inflation.
A depreciating rupee and the accompanied
inflation also have resulted in more people looking for opportunities abroad
for various obvious reasons. This will lead to increased brain-drain.
From the perspective of the IT industry:
In contrast, for the IT industry, the
depreciating rupee has helped in increased revenues but also with an increase
cost to attain those revenues. IT
companies that generate a major part of its revenues from the US based projects
will benefit majorly because they generate more dollar revenues. At the same
time, with increasing operating costs, Sales and Marketing expenses, R&D
and Salary costs offshore, IT companies will face more problems due to
increased attrition rates that could thwart the very foundation of their
business. IT industry as a whole is forced to prey on the available talent
pool, attracting them with bulky (also tricky) pay packages. This has also
resulted in reduced margins.
Additionally, the
depreciating rupee is impacting potential upcoming IT contracts and could
impact onsite costs and international hiring plans. IT BPO (Business Process outsourcing)
business are also facing the heat as any increased revenues due to the
depreciating rupee also leads to increased local wages. Outsourcing firms in the US have started to renegotiate the terms
of some of the potentially renewable contracts.
The
increased pressure from the Indian government to stem the depreciation of
rupee, the IT industry may also be forced to reserve dollars. Loans get tougher
for the IT companies with high interest rates. This impacts the overall margins
that are very much required to stay afloat in the short/long run. Recruitments
in IT firms may have to freeze during times of high inflation, resulting in a
higher unemployment rate. Firms may have to cut down on incentives and other
perks for the employees. Also frequent restructuring could add to higher cost
and reduced margins further enhancing the unemployment rates.
[1] GDP measures the value of all
final goods and services (output) produced domestically over some given
interval of time
[2] Okun's law (named after Arthur Melvin Okun) is
an empirically observed relationship relating unemployment to losses in a
country's production
[3] Negative Interest rates is assessed
as Deposit rates minus loan rates (D.R –
L.R < 0)
