The first week of September saw intense volatility in the currency market, as media reports indicated that the Commerce Ministry was considering setting up a mechanism through which the rupee exchange rate would be determined. This would have given the Centre a lever with which it could weaken the rupee whenever it wanted to. While the Finance and Commerce Ministries were quick to deny the report, a sense of unease continues to pervade the currency market.
Itis clear that with Raghuram Rajan out of the way, the exporters’ lobby is once again trying to cajole the Centre into devaluing the rupee. The former RBI Governor had been a stout defender of the India currency and had made it clear that that the rupee would be allowed to move according to market forces for most part, with the RBI intervening only to smoothen undue volatility.
The exporters, however, think that a strong rupee is making them lose their competitive edge in the international market. But numbers reveal that this argument is flawed on multiple counts.
Are exports really down?
The media as well as the analyst community gets swayed by the most recent data releases, but the picture that emerges from the long-term trend is somewhat different.
First, let us examine the anatomy of the decline in merchandise exports. We compared the increase or decrease in various product categories in the export basket for the period between April to July 2016 over the April to July 2013 period. The 2013 period was selected as the starting point as that is when exports began decelerating. The comparison shows that many categories, including the top three in value terms, have recorded a smart increase in the last three years.
Gems and jewellery accounts for 16 per cent share in merchandise exports; this category recorded a 19.5 per cent increase in rupee value of exports between 2013 and now. Similarly, textiles and allied products that have 13 per cent share, and chemicals that enjoy a 12 per cent share witnessed export growth of 22 and 28 per cent respectively, in value.
It is a similar story in exports of transport equipment (44 per cent increase), machinery (39 per cent), plastic and rubber articles (23 per cent). These categories form a major portion of the country’s exports.
So where’s the catch? Petroleum and crude products, that currently account for 11 per cent of exports, have witnessed a decrease in export value of 43 per cent in the last three years, dragging the growth in the aggregated merchandise exports. With the price of crude more than halving since 2013, this is hardly surprising.
In the same vein, the export of agricultural products, which accounts for 9 per cent of the export basket, too witnessed a decrease of around 17 per cent in the last three years; and ores and minerals have recorded a 10 per cent fall.
These data show that the cyclical downtrend in commodity prices is to be largely blamed for the fall in exports. Other segments of exports have managed to record growth in rupee terms, despite a difficult external environment, slowing global growth and so on. The aggregate merchandise exports between 2013 and now has actually increased 4 per cent.
The experience in other countries
An analysis of the growth in export volumes of countries that have witnessed a severe depreciation in their currency since 2014, however, shows that there is some basis to the belief that a weaker currency aids exports. But the quantum of growth in exports could vary depending on other factors.
For instance, currencies of countries such as Argentina, Brazil, Chile and Turkey lost more than 20 per cent against the dollar since the beginning of 2014. But while exports has grown strongly in Argentina, Brazil and Turkey; Chile did not record any increase in exports in the last three years. Exporters of agri-commodities and crude products have been able to make the most of weaker currencies, but those exporting machinery and electronics have continued to struggle due to slowing global demand.
The wrong comparison
Those calling for the rupee’s devaluation tend to compare it with currencies of countries such as Brazil and Russia. For instance, in the period from January 2014 to now, while the Russian Ruble is down 49 per cent against the greenback, the Mexican Peso down 34 per cent, Brazilian Real down 28 per cent, and South African Rand down 25 per cent, the rupee has lost just 8 per cent in the last three years.
But Brazil and Russia are commodity producers whose economy took a strong hit due to falling commodity prices. It would be better to compare the rupee with other Asian emerging markets such as South Korea, Singapore, Malaysia and Thailand. Currencies of these countries witnessed 5-7 per cent depreciation. Export growth in these countries between 2014 to now is also similar to India’s — in single digits.
The numbers above show that the argument that exports are falling due to the rupee is very weak. Instead of asking for rupee devaluation, it will be better if exporters try to scale up the value chain and improve their product offerings.