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Title:
When a dollar is not 47 rupees...
A budding
professional in India would have to save for about two years to buy a snazzy
motorcycle, but in the US he could save enough in a year to buy a compact
car. There is little doubt that the standard of living is entirely
different, writes MOHAN BABU
One of the
first things that acquaintances (even fairly distant acquaintances) in India
ask on meeting me is, “You must be earning a lot of money in dollars, what
exactly do you make?” This question makes me uncomfortable, perhaps because
of the western thought process that kicks into my mindnone of your business!
Of course, I try to sound polite by gurgling an answer or skipping the topic
altogether. May be I should retortdo you know what I pay in rent? Or, maybe
add that my monthly car insurance payment alone would be more than what most
Indians pay in rent, which does not really make me rich, but goes to prove
that I spend as I earn, even though I live and earn in a foreign country. In
reality, I should probably start talking about the PPP (Purchasing Power
Parity) or the “The Big Mac Index”.
In recent
times, aided by the demand for a mobile global workforce, hordes of
youngsters from India moved to the US, Europe and other western lands in
search of opportunities and wealth. They were aided by the dynamics between
the exchange rates of the Indian rupee and other currencies, making this
move especially attractive. A budding professional in India who would have
to save for about two years to buy a snazzy motorcycle back home, could save
enough in a year to buy a compact car here. There is little doubt that the
standard of living is entirely different, especially if one were to compare
to that of a professional in America with that of an Indian.
The
risk-and-rewards factor also comes to play when an Indian professional moves
to a foreign country. He is taking a big risk with respect to the
marketability of his skills and in trying to sustain his earning and savings
potential, a fact that hit home during the current downturn when thousands
of Indians had to pack their bags and leave.
The exchange
rate differences and Purchasing Power Parity (PPP) make a move from India to
western nations especially attractive. The PPP theory states that exchange
rates between currencies are in equilibrium when their purchasing power is
the same in each of the two countries. Take for example the Big Mac sold by
McDonald’s in 116 countries around the world. It is a truly global consumer
product. Since 1986, the Economist magazine has tracked the price of the Big
Mac around the world. To the Indian reader, contemplating a move to a
foreign country, a study of PPP and the “The Big Mac Index” will give an
indication of the amount one would have to spend in order to maintain a
similar “standard of living” in the new environment. Of course, this also
means that the percentage of salary saved, say ten percent of one’s salary,
will have a greater bang for the buck when saved in the US than in India
since a US dollar is stronger than a rupee.
Currency
conversion and exchange rate is really significant to companies that wish to
do business in the global marketplace. For this discussion, I am assuming a
conversion rate of 1 dollar to about 47 rupees. A million dollars converts
to about 4.7 crore rupees. Take the example of Compuware, a “mid-sized”
American company with revenues of 2 billion dollars last year. The company
is spending over 250 million dollars in building a new headquarters building
in Detroit. Translating this to rupees, it comes to about 117.5 crore
rupees! Last year, after the economy started tanking, Cisco, the darling of
the Internet age, took a monster $2.5 billion write-off of its swollen
inventory. Now, that translates to a staggering 11,750 crore rupees. How
many Indian companies are worth that much, leave alone being able to
write-off inventories worth that amount? This is not to say that Indian
companies are not valuable or market savvy. The flip side of this is that
Indian companies in the global marketplace can use the cost-savings and
lower wages in India to compete more efficiently, the main reason Indian
companies vie for a share of the big export market.
Interestingly, even the dollar-rupee exchange rate has been declining
steadily. When I moved to the US in 1997, a dollar was worth about 35
rupees34 percent decline in the exchange rate in five years! Does this mean
that it is more attractive to move to the US now than it was five years ago?
Probably not, since the exchange rate is just an indicator of a number of
factors including the PPP. However, a declining exchange rate makes it
especially attractive for Indian businesses and exporters to sell goods and
services to Americans.
The downturn
in the global economy, combined with the attractive exchange of the Indian
rupee in the international market, makes Indian exports of goods and
software services a really attractive proposition. Why aren’t we seeing a
renewed focus on Indian exports?
Post script:
If you were expecting me to talk about my earnings in this article, tough!
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