(Commonwealth_India) In a recent discussion on India’s economic evolution, Arvind Panagariya, the chairman of the Sixteenth Finance Commission, emphasized the significance of the rupee’s devaluation in 1991, pointing out that it played a pivotal role in the country’s subsequent economic rise. Reflecting on the policy choices of that time, Panagariya lauded the decision to devalue the rupee, acknowledging that it was a difficult yet essential step for India’s liberalization. He argued that the broader liberalization efforts could have faltered without this devaluation. Panagariya, who also authored The Nehru Development Model, specifically credited then-finance minister Manmohan Singh for his leadership in pushing through these tough reforms.
The 1991 devaluation marked a dramatic shift in India’s approach to its economy. Before this, the country had struggled with balance of payments issues and a sluggish economic growth rate. The devaluation of the rupee paved the way for further depreciation, which persisted for the next decade. The rupee pegged at around Rs 17–18 to the US dollar in 1991 saw a significant drop, reaching Rs 46 per dollar by the early 2000s. Panagariya noted that this change played a crucial role in spurring India’s economic transformation, particularly in export growth. Exports, which stood at just $50 billion in 2002, skyrocketed to $300 billion by 2011-12—a remarkable six-fold increase over a decade.
While the depreciation of the rupee has not been as dramatic in recent years, it has continued to reflect India’s evolving economic conditions. In 2014, the exchange rate was around Rs 61 to the dollar, and today, it hovers around Rs 86. Although the pace of depreciation may seem slower compared to the earlier periods, Panagariya emphasized that it still plays an important role in India’s economic fortunes. He pointed out that such currency movements protect the economy, much like they did during the 1991 reforms. The devaluation helped boost exports, liberalize import licensing, and reduce tariffs, all of which contributed to India’s economic growth.
Panagariya also drew attention to India’s historical experience with currency devaluation. For example, there was widespread criticism of the 1966 devaluation. Under the government of Indira Gandhi, the rupee was devalued by 57%, which sparked accusations of India succumbing to the pressures of the United States and the World Bank. Many viewed the policy as a “sell-out.” However, Panagariya highlighted how India’s approach to currency management has matured since those years. Despite some challenges, particularly between 2009 and 2015 when the country adopted a more hands-off approach, India has grown more sophisticated in managing its exchange rates.
During the period from 2009 to 2015, India adopted a relatively laissez-faire policy toward the rupee’s value, allowing the market to determine its course. While this strategy had some advantages, Panagariya noted that it also led to economic turbulence when external factors, such as the US Federal Reserve’s decision to taper its quantitative easing program, triggered large capital outflows from emerging markets, including India. This illustrated the vulnerability of India’s economy to global financial shifts. Despite these setbacks, Panagariya believes that India’s broader strategy of managing the rupee with a long-term perspective—allowing it to depreciate as necessary while stabilizing in the short run—has largely been the right one.
Panagariya underscored that India’s approach today is more prudent compared to the past, especially given the large inflows of remittances and the country’s reliance on imported capital. These inflows put upward pressure on the rupee, causing it to appreciate in real terms, which could negatively impact India’s export sector. If the rupee appreciates too much, it becomes harder for Indian goods to remain competitively priced in global markets. Panagariya argued that allowing the rupee to depreciate somewhat could ease import liberalization, which would benefit the economy by making imports more affordable and stimulating domestic industry.
In his discussion, Panagariya suggested that India needs to continue managing its currency with a balance between the short-term and long-term perspectives. While the rupee should be allowed to depreciate gradually to reflect India’s higher inflation relative to many of its trading partners, policymakers must smooth out excessive fluctuations in the short term to avoid destabilizing the economy. He believes that this approach will help India maintain the growth trajectory it has seen since the liberalization policies of the early 1990s, as the country navigates both global financial trends and domestic economic challenges.
Ultimately, Panagariya’s reflections on India’s currency policy and its broader economic strategy highlight the complexities of managing a developing economy in a globalized world. While challenges remain, the 1991 devaluation and the reforms that followed played an undeniably crucial role in shaping India’s economic trajectory. Panagariya remains optimistic that, by continuing to follow the right policies, India can sustain its growth and continue to expand its influence on the world stage.
