Why are Indian Rupees dipping vis-a-vis USD?

 Why is it in the news? 

1.The Indian rupee slumped to 49 paise to breach the 87 mark against the US dollar on the last Monday. This downward value of rupee was on account of the meltdown of currencies of the most emerging market currencies and stock markets across Asia and Europe when President Donald Trump imposed higher tariffs on Canada, Mexico and China. He also talked about reciprocal tariffs. This led to the adverse market sentiments all over the world. 

2.It should be noted that in November 2024, the value of rupee was 84.36 rupees vis-a-vis one USD. Within a short span of three months Indian rupees further slid to 87.12 rupees per USD. 

[Source: The Hindu] 

Causes of falling of Indian Rupees vis-a-vis USD

1. Dollar index has been high over the last couple of months. The dollar is appreciating. Dollar index is pretty high against all currencies not only of emerging markets but even with the developed countries. The dollar index has picked up again and is above 109. The dollar index is a measure of the value of the US dollar relative to a basket of 6 major foreign currencies. These major currencies are Euro, Japanese Yen, British Pound, Canadian dollar, Swedish Krona and Swiss Franc. When the dollar index rises, it means the USD is strengthening against these currencies. A strong dollar makes imports cheaper for the US market but can hurt emerging markets like India and imports become more expensive. Thus, a rising dollar index often leads to rupee depreciation. The strengthening of the US dollar has been due to high interest rates which attracts global investors. Rising US treasury yields attract investors to prefer US bonds over emerging market assets, leading to the capital outflow from India. 

2.Secondly, rising prices of crude oil has increased the demand for USD, thereby putting pressure on the Indian rupee. It should be noted that India is dependent on foreign countries for 88% of its energy needs. Since, trade in crude oil and LNG (Liquified Natural Gas) is done in USD, any increase in the prices of these commodities put pressure on Indian rupees and raise the demands for more USD. 

3.Thirdly, geo-political tensions like Ukraine-Russia War, Israel-Hamas War in the Middle East, protectionist policies adopted by developed countries and slow global trade reduced the confidence of investors in the emerging markets like India. 

4.Apart from global factors, there are domestic factors which cause weakening of rupees vis-a-vis the American dollar. These are -

• Trade deficit - India imports more than exports. This leads to an increase in demand for USD and weakening of rupees. Export in merchandise trade reached USD 284.31 billion and service trade reached USD 215.98 billion between April to October 2024. While imports of merchandise goods stood at USD 486.73 billion and import of services reached USD 114.57 billion between April to October 2024 [Source : PIB]. Thus, there is a trade deficit of USD 101.01 billion in the above period. 

• High inflation in India reduces purchasing power of rupees and thus, weakens confidence of the investors. 

• Slow down in FDI and remittances further decreases the supply of USD.

• Outflow of foreign portfolios further weakens rupees and increases demand for buying USD. In 2024, foreign portfolio investors withdrew approximately $9 billion from Indian equities.  

• Fiscal deficit and government borrowings - a high deficit often leads to higher borrowings which increase inflationary trend in the economy leading to the weakening of Rupees. That’s why the government has set the target of achieving a 4.4% fiscal deficit of the GDP in the current budget of 2025-26. 

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What should India do to arrest the slump of rupees ?

1. India needs to strengthen its exports by diversifying its trade agreements with emerging markets of the world. 

2. RBI should intervene whenever there is volatility in the market to arrest the fall of rupees vis-a-vis the US dollar. 

3. More emphasis should be given on foreign direct investment because it entails long term investment rather than on Foreign Portfolio Investment which is only for short term investment. 

4. Domestic institutional investments should be given more priority over FPI and FDI so that DIIs can offset the loss of money on account of outflows of FPI. 

5. There is a need to raise vocal for local so that indigenous production of goods and services gets priority over foreign goods and services. Moreover, India needs to become a manufacturing hub like China so that its dependency on imports is drastically reduced. More emphasis should be given on renewables so that rising import bills on crude oils and LNG are reduced. 

6. Fiscal deficit should be reduced so that inflationary trend in the economy is checked. This is why the current budget of 2025-26 aims at keeping the fiscal deficit at 4.4% of GDP. 

Conclusion 

India should seek alternative methods in international trading. Instead of depending upon USD, it should explore ways and means to trade in local currencies as it had done with Russia so that its dependency upon USD is further reduced. Moreover, India should strive for self-reliance in production of machinery, electronics, IT ,pharmaceuticals and renewables.

Special Features of Union Budget 2025-26

 What is the budget? 

1. Budget is a financial statement of the estimated receipts and expenditure of the government in a financial year. Under article 112 of our constitution, the government has been mandated to present an annual financial statement before the Parliament. No money can be spent without the approval of Parliament. The budget involves the process of collecting, classifying, analysing facts and figures and thereafter, pooling of allocation of different departments and ministers according to its needs. The budget is a blueprint of economic policy of the government. 

2. Budget has three major components. These are receipts, expenditures and deficit indicators. The receipts (income) have three components. These are revenue receipts, non-debt capital receipts and debt creating capital receipts. Revenue receipts are divided into tax and non-tax revenue. Tax revenue consists of direct and indirect taxes. Non-tax revenue consists of dividends and profits earned by PSUs , interest receipts on loans given to state or foreign governments or banks, grants received from foreign governments or international institutions. 

3. Non-debt capital receipts are disinvestment of public sector enterprises , recovery of loans from states, union territory, banks or financial institutions.

4.Debt creating capital receipts are borrowings of the government like government bonds, treasury bills, loans from financial institutions and external borrowings. These funds are used for capital expenditure to develop infrastructure or reduce fiscal deficit. 

Expenditures can be divided into revenue and capital expenditure. Revenue expenditure includes salaries and pensions to government employees, subsidies, interest payments on domestic and external borrowings grants to states and various welfare schemes. 

5. Capital expenditure includes expenditure on infrastructure, acquisition of assets like purchase of machinery, equipment , building , investment in public sector enterprises, loans to states and union territories, procurement of new defence equipment.

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How is the Budget prepared?

1. Estimates of revenues and expenditures are formulated by different departments and ministries and presented to the Finance Ministry.  

2. The Finance Ministry consults NITI Ayog, prominent economists, industry tycoons and different stakeholders.

3. After receiving inputs, the Finance Ministry analyse available data. It prepares the draft of the budget which includes resource allocation to different departments, tax proposals, wage and means to mobilise resources to meet the expenditures in the next year. 

4. Thereafter, it is presented before the cabinet for approval. After getting the approval, the Finance Minister presents the budget in Parliament. But before presenting the budget, the Finance Minister presents an economic survey of the present year which gives details about the performance of the government. 

5. The budget is discussed and debated in Parliament. Once approved it is sent to the President for his approval. 

6. The Finance Minister introduces a finance bill and an appropriation bill for levying new taxes and for withdrawal of money from the consolidated fund of India.  

7. If the government fails to pass the budget in the Parliament, it has to resign forthwith. 

Implication of Budget on the Economy

1. Creates aggregate demand in the economy.

2. Provides income distribution among different sections of the society.

3. Leads to economic growth.

4. Gives a true picture of the fiscal health of the economy.

5. Provides social welfare.

6. Promotes direct investment.

7. Controls inflation by rationalising demand and supply.

8. Promotes exports by  giving subsidies to exporters. 

9. Establishes an amicable relationship between the central and state governments by allocating sufficient funds to state governments. 

10. Addresses unemployment inequality and regional disparity. 

11. It is a reflection of fiscal management of the government and economic reforms. 

Special Features of Budget 2025-26

1. Budget focuses on Gyan, the acronym for Garib, Youth, Annadata and Nari. 

2. It aims to stimulate economic growth by enhancing the spending power of the middle class and promoting inclusive development. 

3. Budget raises the income tax exemption threshold  to ₹12 lakh annual income. Thus, it aims at bringing disposable income for investment and so, creating demand in the economy.  

4. The budget proposes ₹11.21 lakh crore for capital expenditure which represents 3.1% of GDP and shows enhanced expenditure of ₹10.18 lakh crore in the previous year.  

5. Budget proposes to start the Dhan Dhanya Krishi Yojana whereby 100 low productivity districts would be selected to enhance agricultural productivity and farmer welfare.  

6. The short term loan limit was enhanced from 3 lakh to 5 lakh, thereby, benefitting 7.5 cr farmers. 

7. The Government will launch a 6 year mission plan to raise the production and productivity of oilseeds to reduce import dependence. Exemptions were granted for open cells used in LED, LCD TVs, capital goods for lithium ion batteries used in mobile phones and electric vehicles and looms for textiles. A ten year exemption was given on goods used for ship building.  

However, the absence of concrete measures to promote agricultural exports is one of the drawbacks of  the budget. 

8. Fiscal deficit is to be reduced to 4.4% of the GDP. However, the target can only be achieved by increasing growth in the tax revenues. Since, significant tax cuts have been announced to give relief to the middle class the government has lost ₹1 lakh cr investable income. This can be compensated only through asset monetisation plans announced in the budget because there is looming less domestic consumption and weakening external demands arising out of protectionist policies adopted by the USA and other developed countries of the world. 

9. The budget reiterates India’s ambition to emerge as a global manufacturing power house. Last year the manufacturing sector underperformed and it accounts for only 17% of GDP. The budget aims at launching the National Manufacturing Mission and improving ease of doing business. However, India cannot compete with countries like China and Germany in innovation because of the absence of concrete measures to boost industrial research and development. 

10. The budget also revised MSME classification, increasing investment limit by 2.5  times and doubling turnover threshold. Thus, investment limits have been raised in the following manner - 

• Micro enterprises from ₹1cr to ₹2.5 cr .

• Small enterprises from ₹10 cr to ₹25 cr.

• Medium enterprises from ₹50 cr to ₹125 cr. 

Similarly, turnover limits have also been revised 

• Micro enterprises from ₹5 cr to ₹10 cr 

• Small enterprises from ₹50 cr to ₹100 cr

• Medium enterprises from ₹250 cr to ₹500 cr

Thus, the revised  investment and turnover limits aim at achieving higher efficiencies of a scale, upgradation and better access to capital. 

11.  Foreign Direct Investment limit in the insurance sector has been raised from 74% to 100%, encouraging more international investment and competition. 

12. One crore Gig workers will receive identity cards and social security benefits including health coverage under the PM Jana Arogya Yojana. 

13. PM Swanidhi Scheme has been revamped to offer higher bank loans, UPI linked 30 thousand credit cards and capacity building initiatives for street vendors. 

14. An additional 10 thousand medical seats will be introduced in the upcoming fiscal year with a target of 75 thousand new seats over the next five years in order to meet the shortage of medical professionals. The budget plans to establish 200 new cancer centres by fiscal year 2026.  

To conclude - the budget focuses upon economic growth, infrastructure development, social welfare, tax reforms and MSMEs support.