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Pre-debate: Currency, environment



Predebate

On Sun, 21 Jun 1998, Kush Khatri wrote:
> 
> I AM SURPRISED THAT WHILE WE ARE DISCUSSING ECONOMICS AND ECONOMIC
> PUNDITS LIKE FRIEDMAN, ET EL, NO ONE HAS RAISED AN IMPORTANT AND A
> VERY BASIC PROBLEM THAT A COUNTRY LIKE INDIA FACES IN THE WORLD MARKET
> PLACE: I AM REFERRING TO THE PROBLEM OF CURRENCY.  THESE ECONOMIC
> PUNDITS RARELY TAKE THAT INTO CONSIDERATION.  HOWEVER, IT IS A VERY
> REAL PROBLEM FOR A COUNTRY WHICH HAS A "CURRENCY EXCHANGE PROBLEM."
> 
> It is time that this issue is addressed on this forum.  Indian rupee
> is not a green dollar.  The United States can go into billions of
> dollars of trade imbalace (as it does every year -- imports outdo
> exports by several billion dollars)  However, a country like India
> cannot afford that luxury.   With limited hard currency who sets the
> policy for industry?  Does that not effect every aspect of India's
> economy?  India is today more than 90% dependent on foreign imports
> when it comes to petroleum, for example.  Foreign business ventures
> that are gauranteed convertibility of their profits into hard currency
> inevitably involves the Reserve bank and therby the government.  In
> United States businesses do not have that problem.
> Also is it right to give out foreign exchange to Mcdonalds and Coco
> Cola, when serious problems with energy, sanitation, environment and
> water remain?  Who is going to "promote" the priority industries? 
> Liberation, as far as I know, has sort of replaced the old system of
> licensing.  Today, you can grease the palms of Minister and get a
> "Amway" franchise and start selling soap, while the environment
> langhuises.   

Dear Kush,

I appreciate your concerns. However, the policies recommended so far, will
bring in a flood of "hard" currency into India. China receives abbout
70-80 billion dollars of foreign investment each year (someone with
accurate statistics may please enlighten). The issue of capital flows has
already been dealt with to a limited extent in the manifesto. If you wish
you can find out which part you want to highlight. Currency is not a
"problem" by itself. Its price is equally determined by the rest of the
economy's performance.

It is very clear that if current policies continue, of low economic
growth, the rupee will have to be depreciated rapidly and I do not see Rs. 
100 to a dollar being very far away. However, with good policies, not only
will there be a flood of dollars into India but the rupee will
instantaneously perk up and return to the 15-20 to the dollar. Supply and
demand for the rupee determines (or should determine) the price of the
rupee in the foreign currency markets, and there is no mystery here. The
only reason why Australia - with a population smaller than Assam, and an
economy almost as large as India, has hard currency (the Australian dollar
is the 6th largest traded currency in the world) is because of financial
deregulation in the Australian economy, as well as its history of letting
markets determine the price of most things. 

The other point - environment - has also been covered to some extent in
the manifesto. Please propose an alternative view if you feel that we are
somehow responsible for the world's environmental problems. Do read Julian
Simon before that, if possible, and in any case, do read the article,
"Global Warming - Hot Problem or Hot Air?" in The Freeman, April 1998. Let
us be concerned with wild life and forests, but not restrain our economic
growth simply because some folk like the US vice president like to present
doomsday scenarios for political reasons. The story on this is very
complex, indeed, and we can definitely do with a good paper on this topic
as part of the manifesto. Anyone willing to put in the effort?

SS