Dr Narendra Jadhav is Principal Adviser and Chief Economist, Reserve Bank of India, and author of Untouchables : My Family's Triumphant Journey Out of the Caste System in Modern India. Jadhav is a Dalit and in the book he tells the story of his family's struggle for equality and justice. He has based the book on his father's diaries and family stories, and records the life of untouchables through humiliation, abuse and fear. Untouchables has also been translated into several languages. On 16 November, Prime Minister Manmohan Singh, releasing Untouchables and a few other books authored by Dr Jadhav, said: "What I find most satisfying in the work of Dr Narendra is the fact that he mirrors this vision of fighting discrimination along with pursuing modernization."

Narendra Jadhav spoke to Subramaniam Vincent in the late hours of 15 October at Ithaca, New York. This fast paced multi-topic conversation has three connected segments. One is on currency markets where Jadhav in his position as Chief Economist, RBI talks about how the rupee vs. dollar exchange rate has evolved over 60 years. He then talks about oil imports and price hikes. The conversation finally moves on to the controversial topic of reservations for SCs and STs. Jadhav is known for publicly advocating that private sector firms in India must implement reservations.

Let's talk about currency markets. Today, one dollar is equal to Rs 44.30. Some people wonder whether underlying the difference in currency between a dollar and rupee is a lot of injustice. What are the systemic reasons for why the dollar used to be Rs 10 before, then it became Rs 20 and then Rs 30, etc., and so on? Why is it always going this way, as opposed to the Chinese currency?

There are two issues here. One is the size of the currency; why is one dollar equal to Rs 44. That frankly is not relevant at all. There are historical reasons why that is the way it is; size does not depict strength; change depicts strength or weakness.

By that you mean?

Appreciation or depreciation -- if the dollar is equal to Rs 10 now and it then became Rs 20, that change from 10 to 20 is important. But this fact that one dollar is equal to more than other one unit of other currencies is not relevant at all; strength of the currencies does not depend on size.

Like the yen.

Yes; the yen is a good example; the yen is much smaller than the dollar, and there are patches when the yen has been very, very strong. Even today the yen is strong, and yet is very small compared to the dollar. Size is a historical product and I'll tell you how.

After World War II, when all other countries were affected, the country which came out very strong was the United States. Britain was going down and USA was coming up. There was a deal made. The deal was that a few currencies like USD or pound sterling will be used all over the world for transactions and settling payments arising out of exports and imports. Because the rupee would not be acceptable in Timbaktu whereas the dollar will be acceptable in Coimbatore or anywhere else, they were called 'reserve' currencies, as a medium of payment for international transactions.

Now, when that happened, originally the system that came into being after the WW II (when the International Monetary Fund was born) required that every country declare their currency's equivalence in gold. And then comparing the gold points for each currency, the exchange ranges between currencies was decided; so if Indian rupee was equal to say 10 points of gold, and dollar was equal to say 50 points of gold, that meant that one dollar was equal to 5 rupees; so the conversion rate was decided like that.

But in return for the dollar becoming international medium of payment there was a commitment given by the US that it will be prepared to accept dollars. Now the question here is why should a piece of paper issued by the American government be the basis for settling a transaction between Zambia and India?

Why can't they use their own currencies?

They can't use their own currency because it has no acceptability. But why should this piece of paper issued by the US be acceptable then? To take care of that problem, the deal was that the US would stand ready to convert their paper currency into gold at a fixed ratio; and that ratio was 35 dollars per ounce.

Suppose that India was exporting much more than it was importing. The rest of the world would then pay more dollars to India than India pays to others; India will accumulate dollar balances; but those dollar balances would be pieces of paper. Now why should the pieces of paper be important? They were important because there was a guarantee given that whenever any country does not want to keep a piece of paper called dollar, they could always return it to the US government and take gold instead. The paper was good.

And no other country was willing to do this kind exchange? Currencies for gold?

America was the only country willing to do this; this was in 1944 when the IMF and World Bank were established – the Bretton Woods institutions. And the US dollar became the principal currency.

For sometime after that everything worked out well; the US economy was strong and doing very well. But what happened from 1955 onwards was that the Americans started having a huge balance of payments deficit, because they were importing much more than exporting. As a result dollars were accumulating in other countries.

Gold liabilites you mean..

The pressure was mounting. Germany and Japan for example amassed lots of paper dollar currencies and they were getting worried because the gold stock of the US was not growing in that proportion.

The premise was then the Americans had a lot of gold stock?

No the premise was that America was a strong economy and the Americans would buy your dollars back in return for gold. And the rate that was decided was 35 dollars per fine ounce. And that was close to the market price at this time. And this was enshrined in law. Now when in 1955 onwards when US started accumulating deficits and deficits started growing, countries, particularly Germany and Japan started accumulating dollar balances very fast, but American gold stocks were not rising. So there were more and more question marks on whether the US would be able to honour its guarantee. The risk was there.

The worst of the fears came true on 15 August 1971, when under the Nixon administration, the US announced that it was unilaterally withdrawing from the commitment to give gold in exchange for dollars. "Bhaad me jao." (Go to hell.) They unilaterally withdrew. Nixon did it. They said that they were not willing to buy back dollars and give gold. That caused a big problem globally.

The fixed exchange rate system that was until then based on this rule started breaking down. Finally, in two years, in February 1973, the fixed rate system broke down.


Earlier because of the gold parity of dollar, and every country had a gold parity and that had decided the exchange rate, which was fixed.

So the currency exchange rates between countries were not changing then after 1944?

No the exchange rate was more or less constant in those times. The rate could be changed only when countries could demonstrate that there was a fundamental disequilibrium in their balance of payments and they needed permission of IMF to do this. So the exchange rate system was a fixed one. Very rarely changes happened, also because changes meant admission by the country making the change of the fact that its macroeconomic management was poor.

The fixed exchange rate system worked very well, from 1944-45 to 1971. But after this unilateral withdrawal of the US, the system became shaky; after a prolonged debate, in February 1973, the decision was to let currencies float.

Who took the decision?

All the major countries including the US were involved. IMF took the decision. India was a member of the IMF all along. The decision meant that the value of currency, for e.g. dollar, would not depend on gold parity anymore. It would be decided by the market demand and supply. Like any other commodity.

That effectively meant that major currencies including the dollar were independently floating. That is when the exchange rates started changing.

So at this time, what happened to the countries like Germany and Japan who had amassed reserves of US dollars? What happened to them compared to those with lesser reserves?

It would depend -- if the dollar appreciates it would have some effect; if is depreciates it would have some other effect; but the important thing that happened was the fixed rate system broke down. The exchange rate value of any currency depended on the demand and supply of the currency. By individual actions, if there was too much demand for dollar, dollar would appreciate.

The original concern was that those countries would not be able to get gold back for their dollars. Was that allayed at all?

Earlier people had this assurance. Now they had to think whether could keep so many dollars; and they had the option to offload dollars in the international market and buy any other currencies that they wanted, and they did. Those who did not want too much dollar balances, did this, if they thought too much was not good for them. If German authorities for example were to sell dollars and some other country was going to buy, then it would neutralise. So the rates became a question mark. And this system was legitimised by the IMF in 1978.

This is the genesis. Now why is the rupee rate going in one direction only vs. the dollar? First that factual presumption itself is wrong. It is true that for a long time there was a unilateral movement.

It used to be one is to Rs 10 when I was a kid.

It used to be one is to seven and a half rupees even earlier. Then it became 10. And then 20 and went on. And then after 1973 there was this change. When the fixed rate system broke down, in 1976 India attached the rupee with a basket of currencies. The value of the rupee would be decided not in terms of what of was happening to the dollar alone, but what was happening to the dollar, sterling and some others. Depending on what was happening in the market, our rates would change. They were reasonably stable, but there was a one sided movement. But in the recent past, things have not happened in the same direction. In the recent past the rupee went down to 49 per dollar. And now it is at 44+ which means it has appreciated considerably.

The more and more reserves we accumulate, (we have 145 billion dollars now) it puts pressure on rupee to appreciate. What will happen tomorrow, nobody knows. It all depends on demand and supply of dollar at a particular point of time.

But the original valuation changes for the rupee vs. dollar to go from Rs 10 to 20 to 30, what was the reason for that?

This is because India had always a balance of payments deficit. What does this mean? That you are buying from the rest of the world, more than what they are buying from you. Your demand for dollar will be more than their demand for the rupee. So there is a net demand for the dollar vs. rupee. So the rupee would depreciate and the dollar would appreciate.

So in order to balance the books, the value of the rupee will be decreased? And you're saying that was done with at fixed intervals and times with respect to this basket?

Right, and this went on until 1994.

You're saying that we were anyway importing a lot those days and we were having a balance of payments situation.

Right, we were importing more than we were exporting.

So despite the the Nehruvian era of protections, customs duties, more indigenous focus, etc., we were importing more than exporting?

Of course. Oil imports were a big chunk. Out of our total oil needs, we import 75% today.

We made a mistake. In the 1970s there was big debate on whether to go for export promotion or whether to go for import substitution. All the East Asian countries opted for export promotion; India went the opposite direction; we went for import substitution; in other words, rather than focusing on selling more abroad, we tried to focus on creating production within our country, even if it was inefficient, i.e., producing goods ourselves, and substituting for imports. This was a policy that drove us to make a closed economy.

But in 1991, we had a ridiculous situation where we were 15% of the world's population and 7% of the worlds land, and our share in the world's trade was one half of one percent. (Our share of exports plus imports as a proportion of total trade.) A lot of people in India believed that the imperialist powers and capitalist countries were cornering us. That was stupidity. If our share was 0.5% why would the countries with 99.5% of trade share come together to corner us? We were a closed economy.

And still despite low trade share our BOP deficit was very high?

No economy can be completely closed. In the limited trade that we were doing, we were exporting little and importing a lot more than we were exporting. But the levels of both were very small.

RBI market intervention

"The RBI's official position is that the rupee is completely market determined. RBI does not set the rate anymore. If there is too much volatility due to speculation, then we intervene to curb the volatility and stabilise the currency."

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