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Article by Mohan Babu

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!




About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    For FAQ, Trivia and Information on Life in America, visit the Ask-A-Desi section

    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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