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| Cheaper rupee = opportunity | |
| Indian exporters can compete more effectively against the Chinese | | Business Standard / New Delhi November 21, 2011, 0:33 IST | |
The 15 per cent fall in the rupee’s external value, measured against the US dollar, reflects the manifest weaknesses in the country’s external account. The imports of goods exceed their exports by as much as 50 per cent. After taking into account the trade in services and remittances from Indians overseas, the total current account deficit is running at about three per cent of GDP, a higher level than what most economists would consider safe. Net inflows on the capital account have neutralised the deficit on the current account, and it is a relief that foreign direct investment has picked up this year after the slide in 2010. Hence there is no external liquidity problem for the economy, as in 1991, and the foreign exchange reserves position is comfortable. However, the trade imbalance is substantial and has got larger. So it is natural that the rupee should have dropped in value. The Reserve Bank of India has done well to not intervene or try to stop the slide; it has also committed itself publicly to the wise policy of not using the accumulated foreign exchange reserves to shore up the currency. Far better for the rupee to find its true value than for the country to be in Greece’s position: stuck with an expensive currency and, therefore, no maneuverability on the trade account.
A cheaper rupee at a time when the Chinese yuan has been trending up against the dollar should provide exporters with renewed opportunity. The massive cost advantages that Chinese exporters seemed to enjoy must have come under pressure following the currency movements. In any case, Chinese incomes are now much higher than India’s, and as the yuan strengthens China will be forced to exit export sectors marked by low value-addition. This presents an opportunity for Indian exporters to step into the vacuum. There should be new opportunity in everything from textiles to shipbuilding, if government policies can help producers in these sectors. Ideally, this would include reform of labour policies, a review of policies relating to the textile sector, and action to correct the high cost of support services (overland transport, port charges, interest costs, power tariffs, etc). But even without these (let’s face it, it is an unlikely wish list), exporters should be able to spot opportunities now that currency movements are in their favour. However, it will be some months before anyone knows how much benefit has actually accrued.
The flip side of a cheaper currency is that imports become more expensive. This is a positive development where there are domestic suppliers able to offer substitutes for imports — as there are indeed, for a whole range of products. Domestic producers of power generation equipment (like Bharat Heavy Electricals) may be able to compete more effectively against Chinese suppliers. Where import substitution is not possible (as with oil, coal and gas, and many industrial intermediates), the higher cost of imports will add to the problem of inflation. It is important that the government pass on these higher costs to consumers, and not absorb them through subsidies; that is the only way to encourage economies in consumption — one way through which the trade balance can come under control.
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