In 1931, one rupee was worth one shilling and six denarius – or 18 pennies. This, was when India was a colony of the United Kingdom. In 2017, India is among the fastest growing economies in the world and the third largest by purchasing power parity. But today, a rupee will buy you barely more than a penny.
The reason is simple: the rupee has been heavily devalued since the British left India to its own devices. But who decides how much the rupee is worth? For many years, the answer to that depended on what the rupee was made of.
The monetary system of Ancient India was influenced to a great extent by Roman coins. Niska, a gold coin, was considered to be the standard currency (though there is a debate whether the Niska was an ornament rather than a currency). As all of the currency could not be made of Gold, Kautilya advocated the theory of Bimetallism. According to this, the lowest unit of currency used the cheapest metal. It allowed for several metallic standards to circulate currency. Kautilya mentioned three standards of currency – the gold Suvarna, the silver Pana and the copper Karsa.
Even in Ancient India, the currency had a global dimension. International markets traded using a Gold Exchange Standard (GES). It necessitated keeping two reserves – one in the country which adopted it and the other at a foreign centre. Thus, an early GES was set with the ‘Māna’. Māna comes from ‘Man’ meaning ‘to measure’. The Māna standard from India travelled to Babylonia and Assyria, where it took the name, Mina. Later, it entered the Greek monetary system under the name Mana.
Many Empires came and went, but gold and silver remained important currencies. However, numerous currencies of varying weights and fineness prevailed in India. At one point, there were over 994 types of Gold and Silver coins. When the East India Company arrived, to achieve uniformity in the areas ruled by them, they withdrew the recognition of Gold as a legal tender with the Currency Act of 1835, making silver the only legal tender. In 1861, paper currency was introduced.
By the end of the 19th century, silver was falling out of fashion across the world. Every drop in price by a penny led to ten million rupees more being needed to make Sterling payments to England. People started to demand a gold standard, and so, the Coinage Act of 1893 was passed. Silver was on its way out and the paper rupee was rising. Gold and silver mints were closed.
The exchange rate was fixed to the pound at 15 rupees per Pound Sterling. In 1899, the Sterling was made legal tender in India. By the 1900s, India had a budgetary surplus.
The economist, John Maynard Keynes, is known for his macro economic theories, particularly those on the impact of government spending. Keynes’ first publication was focussed on the Indian economy, ‘Indian Currency and Finance‘ in 1913. Following this, he joined the Royal Commission on Indian Currency and Finance, to help the government decide what money India would use and how.
Keynes supported the Gold Exchange Standard, where rupees would be pegged to the Pound, itself pegged to gold. He was critical of the gold/silver standard and wanted a Central Bank that would issue bank notes and promote their use. Keynes believed that the government should decide the fixed value of the rupee to the pound. However, B.R. Ambedkar also suggested the setting up of a Central Bank, but unlike Keynes, opposed the GES in favour of a gold standard.
His recommendations took years before they were implemented, but it made India among the first countries to adopt the GES. Many others followed suit after World War I. In 1934, the Reserve Bank of India was formed.
Following independence, the new Indian rupee gradually replaced the old one – and was pegged to the pound. When the pound was devalued in 1949, the value of the rupee vis-a-vis other currencies dropped.
By the 1960s, India had a severe trade deficit, with an economy relying on foreign aid and lacking in foreign exchange. The 1965 war with Pakistan triggered a payments crisis when major powers like the United States withdrew foreign aid to India. With no other way of paying its arrears, India devalued the rupee – from 4.76 to 7.50 to the dollar, a 57 percent drop in value. India needed foreign exchange, and the move gave it breathing room.
One positive consequence of devaluing the currency is that exports go up due to added competitiveness. India’s trade deficit was cut to a tenth of what it was in just five years.
In 1971, India pegged the rupee to the gold and the dollar, amidst the international financial crisis. Barely months after that, the dollar was devalued – affecting the rupee. The rupee was pegged back to the pound – then later to a basket of currencies to avoid the risks of a single-currency peg.
Over the next two decades, the rupee was considered overvalued thanks to import substitution.
The next big devaluation came in 1991 when India faced another Balance of Payments crisis. The Gulf War had driven oil prices up, and India could barely afford a few weeks of imports. The Rupee was devalued between 1991-92 by 59 percent. Again, this led to a spike in exports and a drop in the trade deficit. From 1993, the value of the rupee was increasingly market-determined, though the RBI could still influence it by buying and selling foreign exchange, i.e., a Managed Float Exchange Rate System. In 2013, the rupee was devalued again, when the U.S. Federal Reserve suggested it would start to taper its massive fiscal stimulus program.
Ultimately, have precious metals gone away? Not quite. Given the rupee’s turbulent history, Indians historically placed greater faith in gold. India imports a staggering quantity of gold, adding to a large trade deficit.
The rupee was devalued for many reasons over time – not all of which were poor for the economy. Currently, with GDP growth and exports both showing signs of faltering, a competitive rupee is just what the economy needs.
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