Your Dollar Earnings Have Started Losing its Sheen – NRI Special
From as long as I can remember, most of us have been enamoured by the idea of working abroad. Apart for the good quality of life and social pride, there was always a sound economic logic of “earning in dollars” being superior than “earning in rupees.”
Most of my friends started earning in US$ when every US$ would fetch you Rs. 45. Over the next six years, Indian currency steadily depreciated and every US$ would fetch Rs. 67 in 2014. As a result, their US$ savings increased by 7% every year in INR terms between 2007 and 2014 even if they let the money lie idle in their bank accounts. The economic logic of working outside India was vindicated!
But something strange happened in the last six months. A coffee shop conversation with my US, UK and Singapore returned friends suggested that they were no longer feeling the pride of “earning in dollars”. I immediately checked my Bloomberg and realized that Indian Rupee had strengthened by 5% against all these major currencies. Infact my friends were feeling “poorer by 5%”. This gave me the topic for my current article “your dollar earnings won’t be as valuable in future”. I am no expert on currency and macro economics but I will make an earnest attempt to explain my thoughts on the topic.
Why was Indian Currency so Weak over 2008 to 2014?
The level of our currency depends on many factors but the two most critical factors are fiscal deficit and current account deficit. While these are esoteric sounding words, they are as simple as running a household budget.
Fiscal deficit is the difference between what your government earns and what it spends. Like most governments in the world, Indian government too spends more than what it earns. During 2008 to 2014, the government spent huge money on populist measures – farm loan waiver, social schemes like MNREGA, subsidies on LPG, kerosene, fertilizer and oil, etc. However, government’s earnings (taxes) did not grow at a proportionate pace. As such, the government borrowed a lot of money from domestic market to fund its expenditures. All of us know that when you borrow a lot, your credit profile in the outside world goes down!
Current account deficit is the difference between what India exports and what India imports. Historically, India spends a lot of money to import crude oil, gold and coal. Our imports have always been higher than exports, resulting in high demand for US$. The twin impact of high fiscal deficit and high current account deficit resulted in high demand for US$ and kept the Indian Rupee under pressure.
Why is Rupee expected to get Stronger ( 60 to 65 levels for next 5 years)?
Over the past three years, India seems to have solved both the above mentioned problems. In all my past emails, I have highlighted that the current government hadn’t done anything big bang (until demonetization) and instead chose to take small but concrete steps. The super strong macro economic position that India enjoys today is a culmination of all these small steps plus demonetization.
Solving the fiscal deficit problem: India’s fiscal deficit has reduced by ~Rs. 1,50,000 crores over last two years because the current government is spending less and earning more! The current government has not announced any big bag populist policies to bring in votes. Instead, it has continued with the schemes announced by the previous government and worked very hard to make them more efficient.
For example, Delhi consumed Kerosene worth ~Rs. 900 crores every year until 2016. We all know that Kerosene is a fuel used by poor people and hence, subsidized by the government. However, corruption in India was so rampant that 90% of the Kerosene sold in Delhi was used by petrol pump operators, small industries, etc to save their costs. The current government has used Aadhar card based Direct Benefit Transfer (DBT) to identify poor people and transfer subsidy directly into their bank accounts. As such, only genuine people now get the Kerosene subsidy and Delhi’s Kerosene consumption has dropped by 90%. Government has managed to save close to Rs. 500 crores in Kerosene subsidy in just one city, without impacting the poor. Similarly, government has cut down its subsidies on Oil, LPG and Kerosene and has ended up saving Rs. 74,000 crores per year. Not to mention, Narendra Modi’s mass appeal led the huge middle class to voluntarily give up LPG subsidy in a big way.
On the revenue front, India’s tax collections grew at 18% in FY17, the highest in last seven years. No doubts that the windfall gains due to declining oil prices have helped, this government’s relentless focus on tax compliance has also helped (demonetization was one of the many steps in this direction).
Solving the current account deficit problem: India imported huge quantities of oil, gold and coal. While lady luck played its role in reducing India’s import bill, the government systematically killed India’s appetite for physical gold by offering various financial products like gold bonds and ETFs. As such, India’s import bill has reduced by more than Rs. 400,000 crores or US$61bn! Thus, India needs far lesser US$ now than two years back. It’s only natural that Indian Rupee should become stronger.
How can you benefit from this trend of strong rupee?
If you are earning in US$, the chances of your salary hikes being higher than 4% are slim. In case you do not invest your money into equities, there is a good chance that your wealth is growing at merely 5% to 8%. While it’s not necessarily a bad thing, you can grow significantly higher if you chose to invest money in your home country’s stock market.
The above mentioned changes in India’s macro economic situation are so formidable, that I would stick out my neck and say that India will be an “island of stability” for the next five years in an otherwise unstable world. Foreign Investors are queuing up for Indian stocks because of India’s stability, growth potential and improving transparency on back of reforms like GST and demonetization. They have invested US$40bn this year and this amount is enough to finance India’s entire current account deficit! Indians have started investing in equities because real estate is down, gold is static and bank FD rates are declining. In fact, foreign investors own 25% of India’s entire stock market, much larger than 15% owned by domestic mutual funds. It looks like foreigners have more confidence in India than Indians themselves.
We generally tend to over-estimate what we can achieve in the next two years but we massively under-estimate what we can achieve in the next ten years. I have reasons to believe that next 10 years will be golden years for India and its investors. Stock market is the easiest way to take part in this growth story and you may ignore it at your own peril. You may live and work anywhere in the world, but India should be the clear winner when it comes to your investments.
Today’s article was dedicated to all NRIs. Feel free to share it with your NRI friends and family members too.
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