Let us assume that
such an event happens overnight without a drastic change in productivity or a
massive drop in real wages.
A good Indian
engineer makes Rs.75,000 per month. Skills wise, this guy might be comparable
to a guy making $3000 in the US.
What if 1 USD
becomes 1 INR and this guy's productivity and salary stays the same? The Indian
guy's salary becomes equal to $75,000. Before he is happy with his paycheck and
go on to buy hot gadgets from the Apple store, a few things change.
Why would a company
pay him $75,000 when you can get someone for $3000 in the US? Of course they
would not. So, every Indian - engineers, teachers, accountants, designers -
would be fired from their jobs and jobs would move out of the country as
workers are cheaper outside India. Where you cannot move the job outside India
(such as cleaning), companies would find tech. An awesome robotic vacuum
cleaner worth $1000 would be used rather than the $4000 pm human cleaner. As
people get removed from the jobs, plenty of other jobs that rely on them
(restaurants, cafes, retail shops, tourism, airlines...) go kaput.
As people get fired,
they will be ready to work for lower and lower salaries, until their salary
drops below the international level of say $2500. Since 1 USD = 1 INR, that
would make great engineers make Rs.2500 pm. How would they pay their EMI
(mortgage) on homes, cars and gadgets? They cannot and they would
default.
The banks would have
huge unpaid loans and they will go bankrupt. Investors would exit and
government would have print a lot of money to keep the banks alive. That would
spike up the inflation and push down the rupee so much that things get back Rs.
60 = 1 USD. At that point, the Indian's wage will be so low that jobs will move
back again and the cycle would continue.
This
is the reason why RBI is very careful not to let rupee too strong. It is to
India's advantage that $1 equal Rs.60. It helps keep exports high, wages high
and imports low.
Ultimately the strength of a currency depends on only two things:
- Productivity of the people. If every guy making Rs.75000 pm is able to produce 25 times more output than a foreigner making $3000, then India can enjoy $1 = Rs.1.
- Inflation. If a country goes through a sustained low inflation in relation to other countries, its currency would move up. That means after 100 years, if your salaries stays the same at Rs.75000 pm while America's inflation takes an average guy there's salary to $75000, then $1 = Rs. 1
As
simple as that. Since, the second scenario is bad, we need to focus only on the
first scenario. How do we get an average Indian produce many times more than a
foreigner?
EDIT:
Based on the comments, I see that people are quite confused by what the
currency rates mean. People assume somehow that $1 = 60 Rs means US is stronger
than India. By that logic, 1 Bangladeshi Taka that equals 1.5 Yen, means the
Bangladeshi economy is stronger than Japan's?
Currencies
had arbitrary starting points. In 1898, the British government fixed 1 rupee
equaled 1 shilling and 4 pence (1 pound = 15 rupees). You could have set
anything. You could have said 1 rupee equals 10,000 pounds as the starting
point and designed the economy that way. It would not have mattered at all. The
starting points are merely for convenience.
What
matters is, whether the currency is moving up or down over long time. The
rupee has gone down against the pound over the last 115 years and that is an
indication that India's productivity has not kept up and/or the inflation was
high relative to UK.
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