New Delhi: Petroleum products and gems and jewellery—two sectors with high import intensity—led India’s export performance in the first nine months of 2007-08 as the country’s overall exports grew at the lowest pace in five years, in rupee terms, in the face of a sharp appreciation of the local currency and slowdown in global trade.
All that glitters: The import intensity of the gems and jewellery and petroleum products sectors is around 90%
Higher import intensity means more imported inputs are used in the production of an exported item. The import intensity of the gems and jewellery, and petroleum products sectors is around 90%. However, experts are still divided on the existence and strength of the link between the performance of import intensive export sectors and an appreciating currency.
India doesn’t produce enough oil for its refiners to process and many of them, including Reliance Industries Ltd (RIL), import crude, refine it in their ultra-modern refineries and export it. In the case of gems and jewellery, diamonds and gold are just two significant imports. India doesn’t have any diamond mines and produces very little gold. Jewellers import these items and work them into jewellery for export.
Some experts say a stronger rupee is likely to benefit India’s exports in the medium term as it may increase import intensity in other sectors too and make exports more competitive by bringing down the prices of inputs. “The rupee appreciation meant that imports became cheaper and that has definitely helped these sectors perform better,” said Rajesh Chadha, senior fellow at the National Council for Applied Economic Research.
To be sure, that’s a trend that could be reversed if the dollar keeps up its recent surge against the rupee. On Wednesday, the dollar closed at Rs42.61, up from Rs39.37 in January. For much of last year, the rupee appreciated against the dollar, making imports cheaper. According to the latest data available with the commerce ministry, gems and jewellery and petroleum products together accounted for over 30% of India’s total exports, in rupee terms, between April and December. Among the top five export sectors, which account for over 75% of the country’s total exports, gems and jewellery and petroleum products are the only sectors which grew faster than the average export growth rate of 7.74% in rupee terms over the same period the previous year. Consequently, their contribution to the country’s overall exports increased.
Exports of petroleum products grew by 21.67% between April and December 2007. Their share of total exports rose to 17.35% in the first nine months of 2007-08 compared with 15.68% for the corresponding period a year earlier. Over the same period, gems and jewellery grew by 11.29% as against 5.59% in the same period the previous year and their share of total exports rose marginally to 12.76% from 12.61%. However, except gems and jewellery, all other leading commodity groups, including petroleum products, witnessed a deceleration in growth of exports during the first nine months of 2007-08. For instance, exports of petroleum products grew by 80.08% in the first nine months of 2006-07.
The final aggregate figures for exports in the first nine months of 2007-08 show that India’s exports grew by 9.39%, in rupee terms, which is lowest in the past five years. For 2007-08, the government had set an export target of $160 billion. But on the back of a 7.32% rise in the rupee against the dollar, a 7.21% appreciation in the real effective exchange rate (that adjusts for the nominal rate with inflation) in 2007-08, and a slowdown in growth of global trade from 8.5% in 2006 to 5.5% in 2007, actual exports, at $155.5 billion, fell marginally short of the target.
N.R. Bhanumurthy, associate professor at the Institute of Economic Growth in New Delhi, said an appreciating rupee is likely to help Indian exports in the medium term. “A stronger rupee may hurt the exports in the short term. However, given the high import intensity of key export sectors, the rupee’s appreciation will help Indian exports in the medium term,” he said.
Most analysts and experts are convinced that the rupee will continue to appreciate against the dollar at least in the medium-term. The greenback’s surge has caught most of them by surprise, although this may have something to do with growing opinion among economists that the US has somehow escaped the worst of a possible recession brought about by a credit crisis and soaring oil prices.
Ram Upendra Das, fellow at the Research and Information System for Developing Countries, a government-funded research institution, said the linkage between an appreciating rupee and its positive impact on the other export sectors, which are not equally import intensive, is not very clear. “For example, take textile exports. One cannot say whether a particular imported fabric was used for domestic consumption or as an input for exports. However, a stronger rupee would make imports cheaper across the board and lead to greater import intensity in other sectors as well.”
According to him, the link between cheaper imports and export performance was easier to locate during the earlier regime when the government issued import licences and an importer had to clarify the use for which a particular commodity was being imported.
Suparna Karmakar, senior fellow at the Indian Council for Research on International Economic Relations, said both gems and jewellery as well as petroleum products have been performing in a similar manner in the past too—an indication that the link between the performance of import intensive export sectors and the rupee’s appreciation isn’t very strong. “Don’t forget that crude oil prices have surged during 2007 which in turn increased the export valuation without a commensurate increase in export volumes.”
Moreover, India’s petroleum exports are skewed to the extent that RIL does not sell its refined petroleum products domestically because of the benefits it gets by exporting under the export-oriented unit (EoU) status. “In the case of gems and jewellery exports there is very little value addition,” she said.
EoUs are enclaves, separated from the domestic tariff area, to provide an internationally competitive, duty-free environment for exporters.