Why the Rupee Keeps Losing Value, What It Reveals, and How India Can Fix It

 

Why the Rupee Keeps Losing Value, What It Reveals, and How India Can Fix It

Hindi Version: https://rakeshinsightfulgaze.blogspot.com/2025/12/blog-post_5.html

Author’s Note

I am writing this article as a follow-up to an earlier discussion

 “https://rakeshinsightfulgaze.blogspot.com/2025/12/how-rupees-decline-exposes-real-cost-of.html?

 on the depreciation of the Indian rupee against the US dollar. In this piece, we explore a detailed reasoning behind the rupee’s decline, the structural issues within India’s governance and economic systems, and the broader forces shaping inflation and purchasing power. We also examine practical ideas on how India can stop the ongoing erosion of currency value.

This article has been assembled through online research, public sources, policy papers, and economic datasets. It is written so readers can understand the strength of the evidence presented. It should be viewed as an analysis built on available information rather than a personal opinion or op-ed.

1. Introduction

A currency reflects the health of an economy. When confidence rises, production expands, and purchasing power is shared across society, the currency holds or gains value. When these elements weaken, the currency follows. India’s past decade offers a striking demonstration of this pattern. The rupee has fallen from roughly 0.0176 dollars to around 0.011 dollars in 11 years, signaling deeper fractures in economic structure, production capacity, and distribution of wealth.

This article explains why the rupee has declined, how inequality and weak manufacturing amplify the problem, why real-world examples like the transformation of Delhi under the Aam Aadmi Party (AAP) show that the situation is reversible, and how small-scale industries can anchor long-term stability. A new section also highlights a major missing factor: the escalating cost of real estate and its powerful ripple effects on inflation.

2. The Forces Behind Rupee Depreciation

2.1 Rising Debt and Weak Return on Investment

Over the last decade, India added debt at a pace far greater than its earlier decades combined. Borrowing is not inherently harmful, but debt must generate value. Much of India’s recent public spending went into infrastructure projects that suffered from quality failures, cost overruns, or poor planning. When debt rises faster than productive output, the currency weakens because future repayment looks riskier.

2.2 Inflation Outpacing Income

Inflation remained high even after global energy prices stabilized, partly due to supply shortages, rising logistics costs, and fractured manufacturing networks. At the same time, wages rose mainly for highly skilled sectors, while millions of labor-dependent workers saw stagnation. This created a three-layered outcome:

• The top 10 percent gained purchasing power
• Roughly 20 to 30 percent stayed unchanged
• More than half the population lost ground

When a currency buys less each year for the majority, it loses internal value long before it loses external value.

2.3 Policy Bias and Uneven Cost Structures

Reforms like the Goods and Services Tax (GST), while beneficial for large corporations, placed disproportionate strain on smaller businesses and the middle class. Combined with high energy costs, inconsistent labor quality, and bureaucratic hurdles, the manufacturing sector struggled to grow. Weak supply raises prices, and persistent price pressure weakens confidence in the rupee.

2.4 Inequality as a Distortion Force

Extreme wealth concentration changes how markets behave. A small group with high purchasing power can absorb steep prices, which encourages producers to set inflated prices even when supply is limited. This creates artificial inflation and widens the gap between the rupee’s printed value and its practical value.

3. Real Estate Inflation: A Hidden Driver of National Pricing Pressure

One major force often overlooked in India’s inflation story is real estate. As wealth concentrated in the hands of a few, the richest began aggressively investing in land and housing across major cities and even smaller towns. This pushed property prices to levels far above what natural demand or supply conditions justify.

3.1 How Wealth Concentration Fueled Housing Inflation

When the top 5 to 10 percent control a disproportionate share of wealth, they can outbid everyone else. Developers respond to this segment, not to the average citizen. Prices escalate rapidly, not because supply fell, but because:

• A small, wealthy class can absorb any price.
• Housing becomes a financial asset, not a living necessity.
• Builders price homes based on what the rich can pay, not what the market needs.

This turns real estate into a speculative market rather than a productive one.

3.2 How Housing Prices Translate Into General Inflation

Housing is not just another commodity. It sets the tone for the entire economy. When homes cost crores, it creates a psychological signal: “If you can afford to live here, you can afford higher prices for everything else.”

This affects inflation in three ways:

1. Producers and service providers adjust prices upward, assuming consumers must have higher incomes if they live in high-value housing districts.
2. Cost of living rises across the board, even when the supply of goods has not decreased.
3. Wage expectations become distorted, putting pressure on businesses, which then raise prices further.

This cycle pushes inflation even when real demand has not increased, and supply has not dropped. It also weakens the rupee because a currency loses stability when foundational living costs rise without corresponding productivity gains.

3.3 Housing Inflation as a Symptom of a Weak Currency

In many countries, a strong currency and healthy economy keep real estate tethered to income levels. In India, housing prices breaking free from income realities signal deeper structural weakness:

• Low-productive investment
• Excess cash chasing limited assets
• Weak manufacturing
• Inefficient tax and land-use systems

All of this reinforces the broader message: the rupee is not backed by broad-based wealth creation.

4. How Foreign Companies Interpret the Rupee’s Weakness

4.1 Case Study: The Audi Pricing Gap

An Audi A4 costs around 56,000 dollars in the United States but more than 1.25 crore rupees in India, even when manufactured domestically. This gap reflects how global firms view India:
• A narrow wealthy class with high purchasing power
• An unstable or weakening rupee
• High production and compliance costs
• Long-standing influence of informal wealth on pricing

4.2 What This Reveals

This pricing does not cause rupee depreciation. Instead, it exposes how global firms assess the Indian economy: a system where purchasing power is uneven and where currency-based valuation is unreliable. When the currency means different things to different groups, it loses universal economic credibility.

5. Manufacturing Breakdown and Its Effect on Currency Stability

India’s manufacturing troubles stem from deeper issues:
• High energy prices
• Corruption and leakages
• Inconsistent labor skills
• Weak quality culture
• Owners extracting profits instead of reinvesting

These factors suppress supply, reduce exports, widen deficits, and weaken the rupee. A currency cannot stay strong when its production base is small and stressed.

6. A Real-World Proof of Concept: Delhi After 2013

6.1 AAP’s Governance Reset

When AAP formed its first government in Delhi in 2013, it invested heavily in education, skills, public services, administrative transparency, and purchasing power at the bottom.

6.2 Education and Human Capital

Delhi modernized government schools, trained teachers, and introduced practical learning models. Human capital improved, raising long-term supply capacity.

6.3 Cutting Corruption and Leakages

Better governance ensured that public funds reached their intended targets. Efficient spending multiplied the impact of every rupee invested.

6.4 Strengthening Purchasing Power

By lowering the cost of essential services and improving healthcare access, Delhi raised the practical purchasing power of lower and middle-income households. This strengthened local demand in a balanced way.

6.5 The Result

Delhi’s experience showed:
• Higher state revenues
• Lower effective debt
• Stronger public satisfaction
• A more stable economic environment

This validated the core theory: when supply, human capital, and equity improve, the economy stabilizes—and so does the currency.

7. Solutions: A Practical, Supply-Driven Blueprint for India

7.1 Develop Small-Scale Industrial Hubs

Cluster-based, well-monitored hubs for manufacturing essentials can increase supply rapidly.

7.2 Stabilize Energy Prices for Small Producers

Manufacturing needs predictable, affordable electricity.

7.3 Train Workers Through Industry-Led Programs

Practical training aligned with real production needs.

7.4 Shield Producers From Corruption

Digital payments, transparent audits, and strict enforcement keep profits with creators.

7.5 Incentivize Reinvestment

Reward companies that upgrade machinery, raise wages, and improve product quality.

7.6 Drive Supply Up by Lowering Input Costs

Stronger supply naturally reduces inflation.

7.7 Reduce Import Dependence

Domestic manufacturing of electronics, medical supplies, and machine parts strengthens the trade balance.

7.8 Build a Culture of Quality and Ownership

Long-term strength requires reinvestment, fair treatment of workers, and consistent quality standards.

8. Conclusion

A weak currency is the result of deeper issues: rising debt, fragmented supply, high inflation, uneven wealth, housing speculation, and weak manufacturing. But as Delhi demonstrated after 2013, targeted investment in education, public services, small industries, and clean governance can reverse these forces.

India’s path to a stronger rupee lies not in tightening controls or artificial defenses but in expanding real production, empowering workers, stabilizing essentials like housing, and spreading wealth creation across society. When the economic foundation grows from the bottom up, the rupee will gain strength naturally.