In Short — The economy will collapse
There is a reason as to why 1 USD is kept valuated to Rs 75 and not revaluated.
- It is to enjoy the benefits of having cheap labour for foreign investments.
- Devaluation also helps in increasing the exports and decreasing the imports.
Now, what would happen if the Indian government decides to revaluate the currency from $1 = Rs 75 to $1 = Rs 1?
(1) No Foreign Investment: The only reason why foreign companies invest in India is due to the availability of ‘cheap labour’.
- Consider that a company pays the employee Rs 1,00,000 per month which equals to $1350/month approx. Now if 1 USD = 1 INR then the company has to pay the employee $1,00,000.
- That would prove costly to the company as they can hire cheap labours from some other country thereby decreasing the foreign investment in the country.
(2) Exports will decrease and eventually stop: Consider that the cost of mangoes in India is Rs 300/Kg ($4/Kg) and the Local mangoes in Canada cost $7/Kg. Then the Indian mangoes would be available in more quantity at a cheaper price in Canada thereby increasing our prospect of export. But if 1 USD = 1 INR then the Indian mangoes will be sold at $300/Kg. Now the local Canadians wouldn’t buy Indian mangoes as it is too costly and prefer to buy local mangoes or mangoes from some other country. This will severely affect our exports.
(3) Rise in Unemployment: This is from point-1. When labours become costly to the company then workers will be fired from the jobs.
(4) When people are fired from their jobs then they will have to start working for a lower salary like Rs 4000/month.
- The worker who would have multiple EMI’s and loans would be unable to pay back to the banks and eventually, banks will default and bankrupt due to people being unable to pay back their loans.
(5) Outsourcing of the jobs will stop due to costly labour.
(6) When there is no capital flow then it will have a negative impact on the economy and it might lead to economic depression.
It is a common myth among the people that if 1 USD = 1 INR then India would become a stronger economy.
For Example:
1 Pound Sterling = 9 Chinese Yuan.
But in terms of economy, China ($15 trillion) is way stronger than UK($3.3 trillion).
Therefore, RBI closely monitors the valuations and keeps them under check so as to enjoy the benefits of foreign investments due to cheap labour, increasing the exports and decreasing the unemployment of the country.
