The Riddle of Falling Rupee Coexisting with Crashing Exports by Arun Goyal

Dr HAC Prasad is a trade expert who is now with the Office of the Chief Economic Advisor as Sr. Economic Advisor in the Ministry of Finance. In his October 2012 paper on the Emerging Global Economic Situation: Its Impact on India’s Trade and Some Policy Issues, he rues the sharp fall in the export growth rate since May 2012. Thus in September 2012 alone, outward shipments declined by 10.8 percent over corresponding 2011. At the same time, the rupee fell 7.8 percent in September 2012 compared to the March 2012 rate six months ago. The devaluation should have boosted exports because conventional economics says that currency fall brings down prices making exports competitive. The expected rise in exports did not take place. In fact, they turned negative by a steep 10 percent! This is the riddle for trade experts to solve.

The phenomenon of falling export growth in India in spite of rupee devaluation is visible even in services sector which grew by a meagre 1.2 percent in the April-June 2012 quarter. On the pattern of the balance of trade, the numbers in the current account deficit and also FDI growth are not encouraging. The blame for falling exports cannot be placed at the door of world trade in goods and services which are set to grow at 3.2 percent in 2012. The US market too shows signs of coming out of recession phase.

In the monograph on India’s trade, Dr. Prasad specifies macro issues like lackadaisical traditional labour intensive exports of textiles, leather, handicrafts and carpets as a factor behind the export fall. He also lists the inefficiencies in the working of the Government agencies at Chennai port and JNPT. Lethargy in reform in the use of the out moded documentation, retrospective amendments to export incentives to deny benefits already granted are some other factors pointed out by him. The many breaks in the movement of export goods due to the intervening holidays on Saturday and Sunday when official agencies desert their posts are highlighted. Practical suggestions are offered in the monograph which could relieve some of these problems.

On the subject of high interest rates, Dr. Prasad suggests that the Reserve Bank allow commercial banks to borrow short term in the world market to pipe the credit to the hungry exporters.

Aggregation of Issues – Need for Structural Reform

In our view, a larger exercise to aggregate the specific problems of the exporters will show up an agenda for structural reform. These results will be the key to the riddle of falling exports coexisting with depreciation of the rupee. (We may well find the prescription for a DGTD type excision of the Reserve Bank of India to free the money market. A drastic overhaul of ports, railways and customs to remove hurdles in the path of exports may be in order. Timely deliveries to foreign buyers must be made, the manmade barriers must go!).

The problem aggregation exercise will also show that the burden of taxation on service sector must be lightened, a universal taxation system on the “one size fits all” will not do. Export oriented services must be exempted in toto.

Last, and most important, retrospective amendments to any law must be banned. The practice is a violation of the promissory estoppel and is also immoral, to use an out of fashion world.

India must join the global mainstream as a willing swimmer. Half-hearted measures of export promotion only result in ingestion of excess water into the body of the amateur swimmer. India is floundering in the shallow waters of world trade missing the mainstream. With its skilled and cheap labour, India can take its rightful place as leader in world trade in goods and services. For this, structural reform and tough measures on the part of the Government is the way forward.