The Hindu Business Line : Exports, more than rupee's worth

Global experience has shown that a fixed or rigid exchange rate is a sure recipe for economic problems; — in extreme cases, as in several Latin American countries, it may also assume disastrous proportions. Equally, a fully flexible exchange rate governed wholly by market forces can also lead to a financial crisis, especially in developing economies (for instance, the Asian currency crisis of the previous decade).

Thus, the popular expert opinion recommends a managed float of the currency for developing countries, that is, full convertibility of the currency on the trade and current account but limited convertibility on capital account, as is now practised by India.

The Reserve Bank of India (RBI) has been quite successful in managing the rupee exchange rate even while progressively liberalising it over the last 15 years. The central bank has been allowing the market forces to determine the value of the rupee and has intervened only to smoothen the fluctuations. The rupee witnessed a steady depreciation against the dollar till about 2002, after which it moved to the Rs 43-45/dollar band. Now, the rupee is at a nine-year high.

Large inflows

During this period, India also witnessed large inflow of dollars on account of increasing exports, booming service exports, greater foreign direct and portfolio investments, and transfers. To stem the appreciation of the rupee against the dollar, the RBI periodically bought dollars from the open market and undertook sterilising operations, that is, mopping up the excess supply of rupees in the market by offloading government securities.

This also resulted in burgeoning foreign exchange reserves. Inflationary pressures were curbed by applying the brakes on rupee appreciation and by sterilisation. Inflation has been kept by and large below 6 per cent in the last six years.

Export performance

Broadly the depreciation of the rupee against the dollar should boost exports by making Indian products cheaper in the international market and to an extent curb the growth in imports by making them costlier, though it adds to the inflationary pressure on the economy.

A country's export performance depends on a whole range of factors — the exchange rate of the domestic currency is only one of these, especially in short term and developing economies. In India, the general perception is that it is quite crucial. Does this perception stand close scrutiny?

The Matrix

An analysis of the data of the last 10 years shows that depreciation/appreciation of the rupee has had no major impact on the rate of growth of exports.

In 1996-97, while the rupee depreciated by 4.7 per cent against the dollar, exports registered a growth of 5.3 per cent in dollar terms. In 1997-98, though the rupee depreciated by 9.1 per cent, the rate of growth of exports came down to 4.6 per cent.

Again, in 1998-99, the rupee depreciated by 6.9 per cent but exports registered a negative growth rate of 5.1 per cent. While the rupee depreciated by 2.7 per cent and 6.5 per cent in 1999-2000 and 2000-01, exports grew 10.9 per cent and 21.0 per cent respectively. In 2002-03 and 2003-04, while the rupee appreciated by 2.5 per cent and 9.6 per cent respectively, exports conversely registered high growth rates of 20.3 per cent and 21.1 per cent respectively.

In 2004-05 and 2005-06, the rupee depreciated by only 0.8 per cent and 1.9 per cent respectively, but exports boomed with growth rates of 30.9 per cent and 23.0 per cent. In 2006-07, the rupee appreciated by 2.3 per cent and exports grew by 22.8 per cent!

Though the above analysis is broad and lacks rigour, what does it reveal? Simply, India's exports have become increasingly cost competitive and the rupee depreciation, and for that matter appreciation, within limits, is not a major factor in determining the rate of export growth.

Credit to exporters

Though the rupee depreciation/appreciation can lead to some gain/erosion in export competitiveness, in the long run only a sustained increase in the competitiveness of the export items, and not the continuous depreciation of the rupee, matters.

This does not mean that an effective exchange rate management strategy is not required in the face of continuing inflow of foreign exchange into India . Then, there is the inflation control objective too.

Significant credit is due to the exporting community which has enhanced its productivity, improved quality, tightened delivery schedules, explored and entered newer markets, adopted aggressive marketing strategies, diversified exposure to other currencies and taken recourse to suitable hedging instruments.

On the other side, transaction costs, though still high compared to global standards, have come down, procedures have been significantly simplified and duty remission/neutralisation schemes have become more focussed.

If the Government concentrates on providing supportive infrastructure, timely export credit at internationally competitive rates and a conducive policy framework, which ensures simplified and transparent procedures, Indian exporters can be world-beaters.

(The writer is Joint Secretary, PHDCCI. The views are personal.)

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