Mumbai: As the threat of a currency war looms large over the globe, it is worth asking if the weakness of the rupee could boost India’s performance in global trade.

An analysis of trade flows and currency movements suggests that the overall buoyancy in global trade flows has a far greater impact on the export performance of most emerging markets including India compared with currency movements.

Among major Asian economies, the ones which saw the most currency depreciation versus the dollar in the last five years have also been the ones with the worst export performance. India’s currency weakened around 22% against the dollar between 2012 and 2017 and the compound annual growth rate in exports during the same period was a meagre 0.2%.

It is worth noting that this period witnessed a slowdown in global trade, with the global trade-to-GDP ratio declining from 60.6% in 2012 to 56.2% by the end of 2016.

Most emerging markets including India performed poorly in export markets in this period.

A historical analysis of India’s trade performance suggests that the biggest factor driving India’s export performance has been world demand.

It is no surprise then that when global trade tanked after the global financial crisis of 2008, India’s exports slipped into red, declining 2.8% on a year-on-year basis after having consistently attained double-digit growth in the preceding seven years.

After a brief recovery since then, India’s export performance has been lacklustre despite several spells of rupee weakness. For instance, in 2012, India’s exports fell 4% despite a 13% depreciation in India’s nominal exchange rate in that year as world trade stagnated.

Given that the China-US trade conflict could dampen world trade once again in the months to come, the prognosis for India’s trade performance does not look bright. The IMF identified the threat of trade conflict as the greatest threat to global growth and prosperity in its recent update of the World Economic Outlook published earlier this month.

With India’s manufacturing sector becoming increasingly integrated with the rest of the world and using more of imported inputs, it has become more difficult for India today to reap the benefits of a cheaper currency than it was earlier. Even though the content of imports in India’s exports shows a decline post 2011, it still makes up for over 20% of India’s gross exports, sharply higher than just 9% in 1995.

As the domestic value added of India’s manufacturing sector declines and it becomes more reliant on foreign inputs, currency depreciation will lead to higher costs of production. This will eventually lead to higher inflation in prices of domestically produced goods and will prevent them from becoming more competitive in the world market. Thus, higher inflation—due to imported prices—might offset any gains from depreciation in terms of export competitiveness.

If domestic inflation continues to remain high and exceed the depreciation in rupee-dollar exchange rate, then the currency would witness appreciation in real terms.

In fact, the real effective exchange rate (REER) has risen for India gradually since 2000 and accelerated post 2013 even as rupee depreciated against the dollar in nominal terms. The contrasting stories of India and Vietnam’s exports to the US illustrate why nominal currency depreciation is often not the biggest factor in trade performance.

Between 2012 and 2018, India’s share of US imports rose marginally from 6.5% to 7.5% while those of Vietnam rose from 7% to around 12%, shows a report dated 5 July by Saugata Bhattacharya and other economists of Axis Bank.

During the same period, the rupee fell around 30% against the dollar while the Vietnamese dong depreciated by just 10%. More than currency movements, it is infrastructural bottlenecks that seem to hobble India’s export performance. A 2015 IMF working paper suggests that unreliable and costly supply of electricity or fuel (coal or gas) limit the ability of India’s export-oriented firms to quickly respond to changing international prices or to exchange rate movements.

While agricultural exports might not face as many bottlenecks as manufacturing, they are the victims of ad hoc restrictions on exports.

As a previous Plain Facts column pointed out, the pro-consumer bias of India’s trade policy has often deprived Indian farmers of remunerative returns in global markets. These restrictions in trade policy seem to have adversely affected India’s share in global food exports, which have declined from about 2.6% in 2013 to 2.3% in 2017.

Unless the infirmities in India’s trade policies are addressed and infrastructural bottlenecks cleared, mere depreciation is unlikely to boost India’s exports much.

This is the concluding part of a two-part data journalism series on India’s trade prospects in a protectionist world.