BANGALORE, India (December 21, 2006) — As part of my M.B.A. program at Suffolk University, I once traveled here to a city that is already the center of outsourcing and is becoming the Silicon Valley of India as well.
Technology companies like Intel, among many others, are building facilities that look like million-dollar resorts — particularly because they are situated right next to tent cities, crumbling infrastructure, deathly-ill beggars, and other examples of poverty that are far worse than anything you’ll see in the United States. A woman sitting on a sidewalk asked me for money by reaching out with arms that ended at the wrists. (I gave her a 500-rupee bill — it was only $12 to me, but it was a fortune to her.) The level of rapid development in India is astounding, even though it will take a long time to trickle down and benefit the poorest of the poor.
Still, India’s economy is growing swiftly. The country’s GDP is expected to grow at least 7 percent in 2007, and the government is aiming for 9 or 10 percent. The number of bars and nightclubs is expanding because of the increasing number of young professionals, and in response the city has even mandated that they close at 11:30 p.m. each night to counteract any, shall we say, loosening of the peoples’ morals. (And I thought Boston’s blue laws were bad.) Even though inflation is a growing concern, the country is looking to grow as quickly as possible.
India’s astounding growth — along with that of China and several other developing countries — is coming at a time when the U.S. economy is slowing and, perhaps more significantly, the dollar is falling. Although forecasting the future value of currency is dubious at best, The Economist was not overreacting when it stated that “over the next few years it seems an excellent bet that there will be a large drop in the dollar… the dollar has lost a total of 35% against the euro since early 2002.”
The reasons are obvious: As the United States’ economy slows and the national debt rises to more than $8.6 trillion, other countries and banks are becoming less willing to buy dollars because the risk becomes too high. (And the Pentagon is now requesting close to $100 billion more for the wars in Iraq and Afghanistan.) If people stop buying dollars, then the United States is indeed in trouble.
Yet there is another worrying sign on the horizon: Iran has announced that it will, according to the article, “use euros for foreign transactions and transform the state’s dollar-denominated assets held abroad into the single European currency.” Iran, which is nothing but hostile to the United States, may have discovered a weakness: its economy, which is one crisis away from sinking as a result of President Bush’s lack of fiscal sensibility. One fear is that OPEC as a whole will convert to the euro as well. The tactic is simple: If fewer people use the dollar, then its value will plummet. If the dollar plummets, then the Federal Reserve will likely raise interest rates to encourage foreign governments and banks to keep purchasing dollars. And if interest rates increase in the United States, the economy will slow and fall into another recession or worse.
The U.S. dollar has fallen not only against the euro and other currencies, but also against the Indian rupee as well. Six months ago, one dollar was worth nearly 47 rupees. Now it’s just above 44.5 rupees. If India continues to grow while the United States falters, then the dollar will continue to fall.
Perhaps, then, it would be smart for investors to convert part of their liquid savings from dollars into euros or rupees. Since the projected GDP growth in most European Union countries next year is lower than 4 percent, India is likely the better choice. If someone converts $10,000 into rupees, he will have approximately 445,000 rupees. If the dollar falls to, say, 35 rupees, then the investor can then convert his savings back later into $12,700.
Considering the likely economic-climate in 2007, this might not be a bad idea.