Wednesday, June 27, 2007

Natural Correction: Dollar Depreciates

I had a previous post about Indian companies like Tata outsourcing jobs TO the U.S., partly because the appreciation of the rupee vs. the dollar (+10% since fall 2006, see chart above) makes American workers and U.S. products less expensive.

The Economist has a new article "India's Strong Rupee" about this issue:

"The main reason for the rupee's appreciation since late 2006 has been a flood of foreign-exchange inflows, especially US dollars. The surge of capital and other inflows into India has taken a variety of forms, ranging from foreign direct investment (FDI) to remittances sent home by Indian expatriates.

Indian policymakers face a difficult dilemma. On the one hand, the rupee's appreciation has benefited the economy by making imports cheaper. This is no small benefit--containing inflation has been high on the policy agenda during the past year.

On the other hand, for both economic and political reasons, policymakers cannot afford to ignore the problems of exporters. Although exports account for a relatively small share of the economy, India's rapid export growth in recent years has been an important catalyst of economic growth.

In confronting this dilemma, government policymakers are undoubtedly hoping that there will be no need for a major intervention. However, the problem is unlikely to disappear soon."

MP: On the other hand, American workers and exporters should be happy, Indians will buy more of our products and hire more of our workers, but American importers and companies outsourcing work to India will be hurt by the 10% depreciation of the dollar, everything in India is now more expensive. Along with the 12-15% wage increases in India due to fierce competition for workers, hiring Indian workers is now about 25% more expensive than it was a year ago. This is a natural correction taking place due to market forces, and demonstrates that political intervention is not only unnecessary but would only serve to distort the self-correcting and self-adjusting features of voluntary trade.

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