The latest trade numbers show that Indian exports in April 2007 were an impressive 23.1% more than what they were a year ago. This was in the month when the rupee moved up by a sharp 5.3% against the dollar. There is a lot to be learnt from the fact that export growth has been robust despite a strong currency.
Ever since the Reserve Bank of India threw in the towel after a long and losing battle to keep the rupee down, exporters have been crying foul. Many economists, too, have said that the export engine will stall. Others, including this newspaper, have argued that there are other likely outcomes of a strong currency—including lower domestic inflation and a productivity shock to the export sector. The potential positive and negative effects need to be considered before castigating the government and the central bank for allowing the rupee to move up so sharply. Acres of newsprint have been used up by the debate on whether a rising rupee will ruin export competitiveness.
The commerce ministry seemed to have bought the doomsday theory. A few days before the new trade data was announced last week, commerce minister Kamal Nath was quoted in some newspapers as saying that the government was considering giving tax refunds to exporters—especially those who did not use imported inputs—to help them combat a rising rupee. The very idea of such selective subsidies was worrisome. Who would certify whether Exporter A used imported inputs or not? The scheme would give discretionary powers to bureaucrats and looked like a fertile ground for corruption.
Then, the commerce minister seemed to have changed his stance. He was later quoted as telling exporters that a strong rupee was “a fact of life”. He gave the rather sensible advice that exporters should improve productivity and innovate so as to be competitive despite a strong Indian currency. It would seem that the minister came out with a new message to exporters after he saw the 23.1% export growth figures—though we are puzzled by this flip-flop, given that he would have known the export numbers at least a few days before the rest of us did.
A strong rupee has not been like soles of lead on the feet of Indian exporters—till now. But while exports grew at 23.1%, imports shot up 40.7%. The trade deficit nearly doubled—from $3.94 billion in April 2006 to $7.06 billion in April 2007. Now, why has this happened? Was the strong rupee a driver of breakneck import growth? Or, should it be argued here as well that these imports were decided on much before the rupee started moving up against the dollar?
We believe it is wrong to draw hasty conclusions based on these new trade figures. The noisiest part of the debate has been based on what has been happening to the value of the rupee against the dollar —the nominal exchange rate. This is the rate that goes into the headlines and tickers.
This ignores the appreciation of many other Asian currencies against the dollar in recent months. Even China, a devoted mercantilist economy, has broken its fixed exchange rate and allowed the yuan to appreciate by around 4.7% against the dollar over the past year. Most other Asian currencies have also had good runs against the dollar in recent months..
The strong rupee is a small part of a larger drama being played out in international finance. The dollar has to weaken, preferably in a gentle manner, if the world economy is to be made more stable. Strong Asian currencies will impact on capital flows and change the balance of economic power in the world. India, too, will benefit—but not before it manages the problems that will crop up in this inevitable transition.
And one such challenge is to keep pushing productivity and innovation in the export sector.
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