A number of economists are pointing to India’s trade data to argue that, contrary to traditional teaching that exports thrive when the rupee depreciates, it is now the other way round. Meaning, exports would thrive when the rupee appreciates.
They say exporters on Sunday rely heavily on imported inputs, so depreciation does not really augur well for them.
During the first eight months of 2011-12 (April-November), total exports were $192.7 billion, while cumulative imports reached $309.5 bn. Exports had been falling on a month-on-month basis from July, with the slowing demand for Indian goods in the US and European markets.
The month-on-month growth rate of exports from July to August, August to September, September to October and October to November was (all negative) 7.9 per cent, 3.7 per cent, 5.1 per cent and one per cent, respectively.
Simultaneously, the rupee had been depreciating against the dollar. Since July, it fell 22 per cent, from Rs 43.95 to Rs 53.72 till December.
Experts are saying exchange rate policy should not aim at export promotion alone, but balance both export and import growth. This would help export-oriented firms to achieve more and with greater efficiency.
“Recent exchange rate depreciation has not really resulted in a rise in exports; rather, the contrary has happened. Exports have indeed slowed. In other words, the impact of the exchange rate on exports appears to pass through imports. This we term import-led export behaviour. Hence, one can argue that exchange rate depreciation could have a negative impact on exports through a rise in cost, and worsen competitiveness through costlier technology imports,” said N R Bhanumurthy, senior economist, National Institute of Public Finance and Policy.
Ashima Goyal, professor at the Indira Gandhi Institute of Development Research, says a large fraction of exports depend on imports, especially on universal intermediaries like crude oil.
“As our export basket has diversified and become more skill-intensive, they compete on quality and not only on low price, so depreciation is not necessary. A stronger rupee allows a non-inflationary rise in wages, thus helping workers get more benefits from growth. However, it is important that the real exchange rate remain competitive, since we have a current account deficit.”
Exporters have also rejected the traditional theory that a falling rupee helps in boosting export revenues.
“There is a perception that rupee depreciation gives exporters tremendous advantage. We forget there is an import parity cost involved and sourcing of raw materials become expensive when the rupee falls. The realisation is only in terms of value addition and margins when the rupee depreciates,” said Sanjay Budhia, managing director, Patton Group, and chairman of the Confederation of India Industry’s national committee on exports and imports.
“Export rise depends on demand and not on the exchange rate. Depreciation of the rupee has very little effect. Given the slowdown, it is unlikely that demand for exports will be high. The current depreciation of the rupee is nothing but a result of speculative attacks,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.