The rupee has been in the news for the wrong reasons. As it has been appreciating against the US dollar over the past couple of years, concerns have been expressed over its impact on exports. The dollar weakened against various currencies for a variety of reasons ranging from the Trump administration’s failure to implement growth boosting fiscal policies to a rebound in the EU economy. But does a weaker greenback spell doom for India’s exports? One problem with this line of argument is that its sole focus is on the rupee-dollar exchange rate, whereas the reality is that the US is only one of our many trading partners. While the rupee has appreciated by 3 percent against the US dollar in the last year, it has depreciated by 5 percent against Euro in the same period. This is important to note because the EU as a bloc is India’s biggest exports market, ahead of the US. While our exports to the US was worth US$ 42.3 billion in 2016-17, the value of our exports to the EU in the same year was US$ 47.6 billion. Another key export destination is the UK (we exported US$ 8.6 billion of goods to the UK in 2016-17) and the rupee has depreciated by 5 percent against the British pound in the last year.
Of course, there are concerns with respect to some other currencies. Like against the US dollar, the rupee has strengthened against the Yen and the Yuan. However, the single-minded emphasis on the rupee-dollar exchange rate makes for good headlines but may not portray the complete picture regarding the rupee’s overall strength. The real effective exchange rate (REER) published by the RBI is a more useful metric to judge the rupee’s movement. Not only does REER consider a basket of currencies instead of one, it also adjusts for price differences between India and our trade partners. Therefore, any fall in our export competitiveness due to rupee appreciation with respect to a major trade partner or rise in domestic prices gets reflected as increase in REER. Analysts use that as an indicator of overvaluation of the currency. Indeed, the performance of REER in the last year indicates a fair bit of overvaluation signaling deteriorating competitiveness of the currency. As per latest data from the RBI, the rupee may be overvalued by about 20 percent according to the export weighted 36-currency REER and by about 17 percent according to the trade weighted 36-currency REER.
But how have our exports fared during the last one year? Contrary to what doomsayers would have us believe, exports have seen average year-on-year growth of 10 percent over the last twelve months. While this growth has come on the back of a slump in exports in the past few years but the recovery is most likely to continue over the coming months. The reason for my optimism is that, in an environment where most large exporters keep their Forex exposures hedged, exchange rate has only a small role to play in export growth. The most important factor really is global demand. The World Bank has forecast global growth to be 2.7 percent in 2017 which will further strengthen to 2.9 percent in 2019. The IMF expects even higher global growth at 3.6 percent in 2017 and 3.7 percent in 2016. As the global economy keeps expanding, India’s exports will continue to prosper. The recent recovery of exports is therefore an indication of an uptick in global demand which would only strengthen in the next couple of years.
There are other important factors that determine exports. Primary among them is productivity of Indian industry that affects our competitiveness in the global market. It is hard to measure productivity of the export sector alone, but according to the World Economic Forum’s latest global competitiveness report (2017- 18), India is the most competitive economy in South Asia, attaining 40th rank in a list of 137 countries. Surely, there is a lot more to do, especially in terms of ease of doing business in India. But the domestic business environment is slowly turning conducive for exports growth. The government’s ambitious Sagarmala project is expected to boost ports sector development by increasing depths through dredging and modernizing the infrastructure at ports. The massive public investment of nearly Rs 7 trillion that has recently been approved for building highways will also help the export sector. The Bharatmala segment of the highways project will create economic corridors by connecting important cities and ports while the envisaged four-lane highways will enable faster movement of cargo vehicles and bring down logistics costs.
One of the features of government policy has been to view the export sector as different from rest of the economy. Certainly, there are some policies such as financial incentives and special economic zones (SEZs) that benefit export oriented companies. But many of the problems of the export sector are the same as those faced by businesses in all segments of the economy. The export sector would greatly benefit if the government fixes the larger infrastructure bottlenecks across the country. In a survey that we at IIM Kozhikode conducted in South Indian states, exporters were asked about the challenges they faced. The problems cited turned out to be the generic but critical ones of poor road and rail connectivity, unreliable power supply and lack of easy access to credit. In fact, larger companies have learnt to live with these challenges as they have ways to get around them. It is the smaller companies who are hit the hardest by poor infrastructure. This is more the case with ‘soft infrastructure’ such as complex procedures such as the process of filing taxes and customs clearances. The government should be sensitive to these operational difficulties and reduce the compliance costs. Availability of skilled manpower is another challenge. Particularly for the export sector, the government must set up skilling centres near SEZs so that the local people can be trained to meet the immediate requirements of industry. Labour market reforms and enabling legislation for land acquisition would help the industry.
We live in a rapidly evolving business environment. Global growth centres and consumption patterns are transforming at a fast pace. Indian businesses need to keep innovating as per changing global tastes and preferences, needs of the global value chain and also identify new markets and geographies. As the GST pangs settle down and the government starts refunding input credits, the improvement of the domestic and global business environments along with forward looking market strategies will drive significant growth in our exports.
Prof. Rudra Sensarma, Indian Institute of Management (IIM), Kozhikode writes this piece for the latest edition of FICCI’s Economic Watch.