In the Greenback We Trust

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A brief history of the dollar in India. Or, more accurately, how the dollar came to enchant Indians so

India’s midnight tryst may have been with destiny, but its midnight trust has largely been in the dollar. On this, there is no doubt. What is not so easy to pinpoint is when this destiny got strapped to the dollar. Twenty years ago? Ten? Forty? None of the above?

Odd as this sounds, Richard Nixon could claim some credit for it. The US president was so sure of the world’s faith in the dollar, and America’s own trust in the divine (‘Goddammit’ was his favourite word), that in August 1971 he yanked the currency off its $35-per-ounce gold anchor and informed trading partners that it was no longer convertible into the yellow metal. It was, in fact, better stuff.

Europeans gasped, Utopians groaned, but Indians living in the Age of Fear (spelt ‘Fera’) nodded in instant agreement. Those were days of dollar scarcity and nights of dollar ingenuity: with greenbacks wallpapered behind posters of deities in prayer rooms, stuffed into cavities of hollowed-out dictionaries, and even rolled into rusty old lavatory pipes. Anything to throw Fera—Foreign Exchange Regulation Act—enforcers off scent: my own preference was for folded bills slid into packs of Liril soap and re-sealed.

Sneaking the cash out on an overseas trip was another challenge. “The official Fera limit was pathetically low,” recalls Abheek Barua, chief economist, HDFC Bank, “We used to carry spare dollars in our socks to get past immigration.” TCA Srinivasa-Raghavan, senior associate editor, The Hindu BusinessLine, even remembers shoes and underwear being put to use. “We were officially allowed only $5 a day abroad,” he says, “And as late as 1993, even for a trip with the PM, for foreign exchange you’d have to queue up at the Reserve Bank of India (RBI), where they’d look at your invitation, your application, even your janampatri, and give it to you.” It was never enough. For the gap, there was a thriving grey market bustling with racketeers, a formidable maze of desi codewords and Hindi numerals to negotiate. “Buying dollars on the street,” says Srinivasa-Raghavan, “was like buying chaaras.”

Almost everything was scarce, of course, including economic sense—which was not such a bad thing for my education, as it turned out. In 1981, it was the promise of fee payments in dollars (by my non-resident father) that secured me and my brother admission to a boarding school in Dehradun. The school needed bags of cement on priority allotment, something only a national calamity, power broker or foreign exchange could ensure. The absurdity of this, as spotted by reformers, was not the greenback acting as a certificate of merit, but the scarcity of a grey powder that anybody with a stone-age chakki could make.

Anyhow, word got around, and new wheels and deals were invented—to secure dollars. Under-invoicing, one learnt, had nothing to do with drama or half-breath dialogue delivery. It was about exporting something for $1,000 and having half of it stashed away in a secret account abroad.

What India had that was worthy of export, though, was something of a mystery at the time. Remember, India’s closed economy had shut out competition (global, local, as a very concept) and left the country’s licence-bound factories much too lazy to churn out anything of international interest. The grand idea was to make everything at home. It’s just that great gushes of oil proved harder to conjure than great thickets of regulation, which meant that the State had oil import bills to pay—and dollars to grab.

The system had to snap some day, and it did after the oil shock of 1991. It caught India so short of dollars that the only way to keep the wheels turning was to open up the economy: to competition. In effect, to Indian and foreign investment, and in principle to the Free Market: the economy’s resources would slowly come to be directed by demand and supply in free interaction. This, as jaws dropped, was to be the guiding logic even in the market for foreign exchange: dollars would legally be available for most functional needs (though not to convert wealth into), with their price set (to an extent) by a balance of the overall sums of what was asked for and what was on sale. “It’s something we’re still getting used to,” says Barua.

The story of the economy’s bounce back is the story of India’s globalisation and dollar influx. “Things have come a long way since,” says Barua, referring to India’s dollar abundance now. The RBI’s coffers are stuffed with greenbacks, and there’s more than enough to pay for all manner of imports—bras of Marks & Spencer and jars of Marmite included.

So, that pins the destiny turning point on 1991, doesn’t it? Ah, not quite. The story is not done yet. Globalisation has given India not just easy access to dollars, but also risks that can be traced to America’s external debt—a figure that runs into trillions. Ever since the US gave up gold as its currency anchor, it has gleefully used its dollar presses to print cash for imports, cash that has piled up as reserves in other countries (only to be lent right back to the US). Since 2001, in particular, America has been on a trumpet-blaring parade laced with stardust and confetti. Look closer, and you’ll notice what’s being spewed about in the air are wads of dollars. It’s a bout of monetarist mania that is eye-popping in its audacity, inflating asset price bubbles the world over and threatening mayhem once they burst (in 2008, the US housing bubble did). India too has had billions tumble into local assets, with foreign institutional investors pumping in a record $40 billion in 2010. Much of it is ‘hot money’ that could flee in an instant. “The problem is not inflows, but possible sudden outflows,” says Srinivasa-Raghavan.

Whatever, big gambles are being taken with big money. And the funny part is, nobody knows which way the dollar will go—up or down—since economic logic seems to have deserted the scene. An overprinted currency, for example, ought to lose its global value, but the dollar has defied all forecasts of doom. ‘It really is only a matter of time before the US will not be creditworthy… a dollar crisis is inevitable,’ wrote Richard Duncan, a top dollar analyst, in 2005. Well, it’s 2011, and going strong. “The dollar has this habit to surprise,” says Barua.

Could the dollar lose its supremacy anytime soon? “No chance,” says Srinivasa-Raghavan, “There’s no challenger to the dollar.” Indeed, despite America’s Great Recession, the world’s money has been scrambling to convert itself into dollars at the slightest tremor anywhere, boosting its value. “Old habits die hard,” says Barua, “It still remains the safe haven currency.”

On that again there is little doubt. What’s hard to figure out is when exactly the dollar charmed its way into Indian hearts and minds.