A major foreign exchange earner, Keralites suffer when the value of the Indian currency appreciates because every dollar or dirham they earn then fetches fewer rupees. There is, however, no mechanism to compensate them for the consequent losses.
Currency fluctuations directly affect two groups of people: exporters, who include producers of cash crops, and about two million people working abroad, a large majority of them in the Gulf States.
As the rupee declined continuously against the dollar and the Gulf currencies pegged to it in the closing decades of the last century, both these sections were happy as their bank accounts kept swelling.
After the turn of the century, the rupee gained strength, eroding the earnings of non-resident Keralites. However, the extent to which it affected the State's economy was not immediately clear.
KK George, Chairman of the Centre for Socio-economic and Environmental Studies, Kochi, and Remya S, a research assistant in CSES, have now quantified the loss to the State resulting from the rise in the value of the rupee since 2003-04.
They have estimated that non-resident Malayalees (NRM) suffered an aggregate loss of Rs 86.60 billion during a period of four and a half years as the value of the rupee appreciated.
George and Remya are of the view that the rise in the value of the rupee was not entirely due to the growing strength of the Indian economy, as is widely assumed. It was partly a result of the steady depreciation of the US dollar. They believe the large inflow of funds to the Indian capital market, a good proportion of which was of a speculative nature, also contributed to it.
The CSES has published the findings of their study in a working paper titled "Impact of rupee appreciation on non-resident Malayalees".
According to George and Remya, as the Reserve Bank was reluctant to intervene in the exchange market and conduct sterilisation operations, the value of the rupee rose unhindered. The appreciation became steep after July 2006.
The average exchange rate of the US dollar, which stood at Rs.47.69 in 2001-02, rose to Rs.48.40 in 2002-03. Thereafter it fell continuously for three years -- to Rs.45.95 in 2003-04, Rs.44.93 in 2004-05 and Rs.44.27 in 2005-06. In 2006-07, it went up again to Rs.45.28 only to slump to an average of Rs.40.21 during April-December 2007.
"Despite the importance of agricultural commodities and products of labour-intensive traditional industries in the State's exports and the big role played by NRM remittances in the State's economy," they observe, "the steep appreciation of the rupee and its adverse impact have received very little attention among political leaders, policy makers and the media in the State, with very few exceptions."
They put NRM remittances in 2004 at 18.4% of Kerala's gross state domestic product. Non-Resident Indian remittances formed only 2.9% of India's GDP in that year. These figures show that NRM remittances are far more important to the State's economy than NRI remittances are to the national economy.
They point out that the annual loss to NRMs and the State economy on account of rupee appreciation (estimated at Rs.10.26 billion in 2003-04, Rs.13.10 billion in 2004-05, Rs.18.90 billion in 2005-06 and Rs.16.67 billion in 2006-07) exceeded the total Plan grants from the Centre to the State (Rs.6.97 billion, Rs.9.33 billion, Rs.8.00 billion and Rs.9.98 billion respectively).
Business organisations represented to the authorities the case of the exporters who were affected by the appreciation of the rupee. Following this, the Central government offered them relief by way of interest subsidy and other measures. While the exporters got interest subsidy of Rs.83.51 billion, not even a token subsidy was offered to NRI bank deposits.
George and Remya describe the silence of policy-makers and opinion leaders in Kerala in this matter as baffling. "The sheer number of emigrants and remittance receiving households should have made them sit up," they say.
They add, "It appears that despite their importance in Kerala economy, the NRMs have not acquired sufficient clout and lobbying power with the State government, not to mention the Central government."
From the NRM point of view, there was a slight improvement in the situation since the beginning of this year as the rupee declined in tune with the downward trend in the stock market. But financial experts expect the rupee to bounce back when capital inflows rise. Obviously Keralites still have cause for worry. --Gulf Today, Sharjah, May 19, 2008.