|More than just the rupee|
|Thursday, 15 September 2016 00:00|
Poor global demand and low productivity hit exports
Though the commerce ministry’s Cabinet note, going by a news report in The Indian Express, wants a ‘formal institutional mechanism’ to determine the right value of the rupee, it would be naïve to hold an overvalued rupee as responsible for India’s poor exports performance—except for June, India’s exports have been contracting for 18 straight months now. Certainly, an overvalued currency makes exports more expensive and is a deterrent, but it is unlikely that prices are as important a factor in poor exports performance as compared to several others. In the boom years of 2004-08 when Indian exports grew by over 25% annually, the rupee appreciated significantly, from 48.3 to the dollar in FY03 to 40.2 in FY08—the reason why the prices of Indian exports rising didn’t lead to a contraction was that this was also the time when the global economy and trade was booming; during that period, global GDP rose 4.7% and trade 7.8% as compared to 3.1% and 2.7% today.
But, the argument goes, the value of the currency becomes very important especially at a time when global growth and import demand is muted. While the specifics will be different for each commodity, a good example in this context is textile and apparel exports to the US—the EU is a bad example since it gives duty benefits to exports from poorer countries and this distorts the exports performance. Between July 2015 and July 2016, Vietnam’s exports to the US rose 6.1% and those from Bangladesh rose 6.8% while those from India rose a mere 0.8%. During this period, the rupee depreciated 2.1% against the dollar, the Bangladeshi taka depreciated 0.7% while the Vietnamese dong appreciated a little less than 1%.
Though it deals with only apparel exports, a World Bank report, From Stitches to Riches? offers an explanation while pointing out that, in the post-MFA period of 2005-12, India’s apparel exports rose just 3.7% a year versus 18% for Vietnam, 15.7% for Bangladesh and a healthy 6.9% for China which already had a very large export base by 2005. For one, hourly wages in India were $1.06 in 2012 versus $0.51 in Bangladesh, productivity was lower (India is ranked #6 in a buyer perception survey versus #3 for Vietnam), it has longer lead times in deliveries (India is ranked #6 versus #2 for Vietnam) and has a poor presence in synthetic fibres compounded by high import tariffs on them. While the competitive position will differ in different export areas, a lot also depends on how well integrated Indian firms are in global supply chains as also the quality of India’s products—in the refinery space, with Reliance’s refinery among the top in the world, India is very competitive while in the case of automobiles, being part of Suzuki or Hyundai’s export chain is a big positive. A competitive currency will obviously help boost exports, but at a time when FDI and FII flows are strong, weakening the currency will require RBI to buy dollars which implies a cost and can trigger competitive devaluation by other countries—apart from the fact that a weaker rupee is also more inflationary, it also hits companies with high foreign debt.