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Falling exports could hit Indian economic growth

By R.C. Rajamani. Dated: 9/26/2016 10:44:20 PM

In the middle of September, the Indian Rupee came under severest pressure in many months following reports that the Ministry of Commerce and Industry had proposed setting up of a "formal institutional mechanism" to determine the right value of the rupee for competitive advantage in export markets.
In the absence of official denial or confirmation of the suggestion of virtual devaluation in time, the Rupee fell to touch 67 level against the US dollar. Reports had earlier speculated that the commerce ministry and finance ministry were planning to meet to devalue the currency.
The news, predictably, flustered the stock market, prompting investors pull out funds. The rupee recovered a bit after the government finally scrambled to launch damage control. Commerce minister Nirmala Sitharaman and economic affairs secretary Shaktikanta Das denied any plans to devalue the currency. The steep fall in rupee is the lowest since 28 August, 2013 when it had touched a record low of 68.85.
Experts point out that unlike China, the exchange rate in India is not artificially controlled or pegged by the state, but is determined by the market in line with the inward/ outward capital flows on a daily basis. "The Reserve Bank of India (RBI) is the authority in managing the exchange rate market, not the government. Even the RBI doesn't fix the rate of the rupee's float value. It only intervenes when there is high volatility in the currency market. Such intervention happens through state-run bank treasuries, which are the major participants in the Indian currency markets," the experts argue.
Singapore-based DBS Bank economist Radhika Rao has since argued against any short-cut. "Such an attempt would run counter to recent efforts by the Reserve Bank of India and the government to establish macro-stability, transparency and policy predictability to attract and retain investors. Not only could such a shift harm investment interests and trigger capital outflows, but also dilute the boost from the ongoing reform agenda. Memories of China's attempt to devalue its currency last year and resultant spike in volatility will also be a deterrent for the Indian authorities."
The real fear is that such an action will send a message to the investors that the Indian rupee value is no longer transparent but is something which can be altered by the government at any point artificially. Also, forced devaluation of the rupee will go against the spirit of economic reforms. India is likely to be looked with some suspicion by global rating agencies.
What is more, it will erode RBI's credibility as the authority managing the currency market.
Even as the flux over 'devaluation' was yet to subside, reports came of Indian exports falling for a second month in a row. The exports fell 0.3 per cent to USD 21.51 billion owing to decline in shipments of products like petroleum and leather. The outward shipments stood at USD 21.58 billion in August 2015
The country's imports, too, contracted by 14 per cent to USD 29.91 billion, leaving a trade deficit of USD 7.67 billion in August, which is the lowest figure in three months.
India is not alone when it comes to reduction in the growth of exports as the latest WTO statistics show overall there has been a decline in the growth of exports for the biggies too. The US experienced a decline of (-4.35%), EU (-2.16%) and China (-4.94%). Positive indicators were seen in Japan which exhibited a growth of 8.67% in June 2016 compared to the corresponding period of the previous year.
World trade has been shrinking as demand slowed in key American and European markets. Growth in the volume of world trade is expected to remain sluggish in 2016 at 2.8%, the same as in 2015, the World Trade Organization said in an April report. Now, India's s earlier target of $900 billion in the export of goods and services by 2020, raising the country's share in world exports to 3.5% from 2% now, looks more daunting, according to trade watchers.
The Economic Survey released in February had argued that even though India's long-run potential Gross Domestic Product (GDP) growth is 8-10%, its actual growth in the short run will also depend on global growth and demand."After all, India's exports of manufactured goods and services now constitute about 18% of GDP, up from about 11% a decade ago."
India's exports account for just 1.7 percent of world trade, compared with nearly 12 percent for China. It aspires to grab a 5 percent share of global trade by 2020. Exporters have been clamouring for a softer currency to support shipments amid sluggish global demand.
There are many who are quick to buy the hypothesis that a devalued rupee can indeed help exporters. But most experts agree that it isn't the currency value but the quality of exports and global demand that'll help boost exports. A devalued rupee can hit importers badly and result in a wider trade deficit. It can also add to the inflationary pressures.
Instead of looking at quick-fix solutions, the government should work with exporters towards improving the quality of Indian goods in the international trade market. Prime Minister Narendra Modi who has a quick grasp on trade and commerce can be trusted to understand the real mechanics of economic growth through a proper balance of exports and imports. He has time till the end of March to improve matters during the rest of the current fiscal - another full six months.
—[IFS]