The rupee has been breaking its own records over and over again by recording new lows against the dollar. Most analysts list the following factors for the downfall of the rupee making it the worst performing currency in Asia:

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  1. Strengthening of Dollar Index.
  2. Huge demand for green back by oil importers.
  3. Hedging by FIIs, seeing a possible correction in the currency markets in the near future.
  4. Sky scrapping gold import volumes.
  5. Lack of reforms or inability of the incumbent to swiftly introduce reforms to encourage investment inflows.

A careful look at this and one would realize that these are nothing but defence mechanisms that have now failed to curb further downfall in rupee value. The following key questions that arise:

  1. Why should the economy be only dependent on FIIs to strengthen the rupee when we know it is not a permanent or say reliable solution?
  2. Why has the Government failed to curb gold imports even after increasing the import duty? They are clearly missing something here or they are completely clueless.
  3. Most Important: Has the Government looked at other avenues for reducing downward pressure on the rupee?

Clearly, the government has failed to find other mechanisms like boosting the Manufacturing Sector and thus the exports.

Simple Logic: If someone buys an Indian product from US, he has to pay the Indian manufacturer in Rupee. He converts his USD into rupee. This effectively means he sells USD and buys Rupee from the forex markets. If the demand for Indian products increases many-folds, the demand for Indian rupee will increase and continue to strengthen the Indian rupee against the dollar. For that to happen, the manufacturing sector in the country needs a boost.

“Poor implementation is a root cause for India’s poor performance in Manufacturing. In China, and Japan and Germany—countries that have developed very competitive manufacturing sectors—things get done.” – The Manufacturing Plan; 12th Five Year Plan; Planning Commission of India.

The Planning Commission, headed by the Prime Minister, has realized our inability to turnaround the manufacturing sector. Even a small nation like South Korea for example has a number of chip manufacturing units while a heavy weight economy like India still awaits a state of the art chip manufacturing plant. The manufacturing sector in China is about 35% of the GDP as against 16% in India. China’s contribution world manufacturing is about 14% compared to a paltry 1.8% Indian contribution. China has achieved all this in just a little over 20 years.

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Clearly, the economic signals over the past five years have shown that an economy cannot solely depend on one sector (services in our case) to steer the economy towards prosperity. It has to a mix of several sectors. Continued government apathy or may be failure to improve this sector is beginning to show its effect on the economy during these troubled times for services sector.

And hopes of reviving the rupee against the dollar will continue to depend on non-permanent or short term measures.

 Aditya Dutta
 http://www.linkedin.com/in/adityadutta
 Twitter: @aditya_datta

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