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How bad is this trend for India, one of the emerging economies in Asia, and other Asian nations? How bad is this downslide for the U.S. dollar, prestigious as it is across the world?
Gold has reached a record value of US$1,000 an ounce, while futures are hovering even higher. Oil has peaked at nearly $110 a barrel, the Japanese yen climbed to a 12-year high of 99.75to the dollar, initially raising fears of export losses before creeping back to 100.27 yen. Asian stocks are all jittery, falling sharply across the region's stock exchanges.
Oil consumption, which naturally grows along with the population at about 1.5 percent, fell 0.7 percent last week according to a U.S. Energy Department's Energy Information Administration report. A fall in demand despite growing supply could not hold back oil price rises in the past. A weak dollar attracts foreign investors, who buy more and sell oil futures in dollars as crude futures offer a hedge against a falling dollar. It automatically raises the price of oil despite lowered consumption.
The Indian rupee has strengthened against the U.S. dollar, but falling stocks take the heat off. A firming rupee against the greenback is not good news for exporters and information technology companies with markets mostly in the United States.
IT and ITES (information technology enabled services) or call center companies are the toast of the Indian success story. With high salaries and incentives, this sector employs around1 million people from the middle class, who have generated a spurt in shopping malls, entertainment services and real estate.
Over the past year incentives and pay rises have been hit owing to the erosion of profits from a plummeting dollar. Unless the dollar picks up and the U.S. economy is back on track, fear of an outsourcing pullback by a future president lies ahead.
But a falling dollar against the rupee is bound to increase more foreign direct investment inflows into India. Foreign institutional investors, who plough in dollars, will benefit more from the stock market, which has shown bearish signs at the upper levels recently. Sale proceeds from Indian stocks will yield more dollars on the way out.
While FDI's may help in sustaining the Indian economy, which has a healthy growth rate and may not affect the burgeoning middle class much, the bulk of the population outside the ambit of growth in rural and semi-urban India will be badly hit. Global food grain prices at an all time high will spiral upwards as transportation costs may also go up.
Asian countries like Vietnam and Bangladesh, dependent on garment and textile exports with most of the raw materials imported, are already feeling the pinch of a depreciating dollar. Most of their exports are to the United States.
And the misery may not be a short-term phenomenon.
What began as a real estate slump in the United States from sub-prime mortgages that had shot up in the course of a housing boom in the 1990s is fast spreading to other sectors. People who could not afford houses were offered credit and now foreclosures are piling up.
Unemployment is up in the United States even in the manufacturing sector, which is supposed to hire more with the bright possibilities of "Made in USA" exports rising on the strength of a weak dollar. And Federal Reserve interest rate cuts to boost lending, hiring and spending may be offset by rising inflation.
In a recent speech on how to rev up the economy, President George W. Bush had to punctuate his words frequently with "these are tough times." They are very tough times for Americans, as their government has already spent a whopping US$4 trillion on the war in Iraq, for reasons known or not known to the president. The war certainly shows no signs of abating during his final months in office.
And with Chinese and Arab funds parked in the United States, any nervous sell-off over dollar fears could prove near fatal.
Meanwhile the miniscule tour operators in Taj Mahal city hope to see more European and Japanese tourists, rather than Americans, visiting the beautiful monument that provides their livelihood.
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(Susenjit Guha is a freelance writer living in Kolkata, India. He can be contacted at sguha60@yahoo.com. ©Copyright Susenjit Guha.)
