India is currently ranked as the sixth largest economy in the world by GDP, so it’s understandable that any economic woes related to the country could have a significant impact on the economy of the other nations.
As a growing and developing nation, India has been encountering unique challenges, especially due to its large population size — currently weighing in at 1.324 billion. One of these challenges appears to be the falling rupee.
Despite a Strong Economy, the Rupee Struggles
India’s economy has been doing incredibly well, as it has expanded into a multitude of sectors ranging from technology to manufacturing. Globalization has been a net positive for India, bringing Indian workers closer to international companies that can deliver higher wages and better resources. However, even as the economy has grown, the rupee has been losing value.
The rupee has lost 13% of its value to the American dollar over the course of 2018, substantially reducing its economic buying power on an international scale. While the government of India is attempting to reduce this slide — by doing things such as limiting unnecessary imports — it may not be effective.
The Consequences of a Struggling Rupee
For India, a failing currency means that it is harder for the country to build its own wealth. India may not be able to buy the goods that it needs from other countries, which is important as India imports over 80% of its gas and oil. (In fact, this is one reason why India’s currency may be failing.)
However, it does progressively make it cheaper for companies to outsource to India; both purchasing from India and getting workers from India becomes less expensive. This is part of the explanation as to why India’s economy can be improving while its currency is falling; as its currency falls, business actually becomes more attractive there on a global scale.
Of course, that isn’t a sustainable situation, as a weak currency makes it difficult for India to invest in its own infrastructure and court other domestic investments. In fact, a weak rupee could eventually cause the economy to stagnate, even if it hasn’t done so yet. If companies in India falter, it could have some substantial impact on companies throughout the world, as many organizations do outsource at least some of their work through India.
India and China Begin to Pull Back
On a global scale, patterns are beginning to emerge as many countries are now pulling back on their imports. Developing countries must import more than they export, which ultimately ends up leaving them in debt. This is why India’s government is primarily looking to reduce importing to stabilize.
Meanwhile, China is in a different situation which leads to similar measures. The recent trade war with the United States has also caused China to pull back on its own importing and exporting. What we may be seeing soon is reduced importing and exporting throughout the largest economies in the world, as many countries begin to focus on stabilizing and improving their internal economies
Moving Forward as the Rupee Falls
India’s currency is likely to continue falling for the foreseeable future; interesting news for foreign exchange investors, but also important for other investors to track. As India will be reducing its own imports, there could also be some impact on the oil and gas market, as this is the primary product that India imports and its primary dependency on the rest of the world.
In fact, volatile oil prices could very well decide the future of India, as a sharp increase could have some dramatic ramifications on the currently growing economy.
Companies that do business with India will need to be mindful of the continually falling rupee and the consequences that this could have on the Indian economy as a whole; shifting interest rates, disinterested investors, and changing costs related to both labor and goods. Presently, the future of India may be very closely tied to the future of the oil and gas industry.
Regards,
Ethan Warrick
Editor
Wealth Authority