Depreciation and Trade Deficits in India: Problems of Foreign Exchange and Domestic Industrialisation Base

Abstract

The present article develops an argument in which depreciating Indian rupee is basically due to underdeveloped status of domestic production base that is reflected in continuing trade deficits. It argues that price theoretic policies not only manage trade imbalances but also completely neglect the revival of domestic production base that can induce a tendency towards exports-led correction of the trade imbalances, that is, it neglects the importance of exports to make a transition towards strong production base, manageable trade balances and strong foreign exchange status; if so, the continuing Indian deprecation negates international financial stability status. The present article provides an alternative policy focus that is on finance-led initiations of broader Youngian–Kaldorian division of labour that favourably shapes demand-based market mechanism (and growth of aggregate demand) and results in sophistication in industrial differentiation, that is, increased specialisations in intermediate goods production. It is argued that such transition confers a developed status with respect to the (BBoP basic Balance of Payments i.e., trade and foreign direct investment [FDI] inflow prospects), which in turn is crucial to achieve financial balance of payments (BoP) stability. All in all, the price theory is inapplicable when trade is based on absolute cost disadvantages and Keynesian policies provide the solutions.