The finance minister is reported to have said in London that he is thinking of how to help exporters tide over the impact of a rising rupee. The option, of course, would be to try and keep the rupee down, as China is accused of doing with the yuan. Indeed, the widely debated question is whether such mercantilism explains China's economic success of recent years. While some have argued that China's currency is massively under-valued, others have contended that the yuan's value is not terribly out of line""in other words, the Chinese miracle is not driven by cheap currency alone. In the Indian context, one explanation for long years of under-performance is that the rupee was consistently overvalued, leading to persistent foreign exchange problems. This was corrected only when Manmohan Singh assumed charge as finance minister in 1991 and substantially devalued the rupee in a quick double-step. Now, 16 years later, the rupee has been climbing against key international currencies because of the current account surplus in the January-March quarter and strong capital inflows, so a weaker rupee is what exporters clamour for once again. Commerce Minister Kamal Nath, while echoing the exporting community's woes, has argued for concessions from the government over and above what he announced some weeks ago. Indeed, while commenting on the export performance during May, when export growth dropped to 18 per cent, compared to 23 per cent in April, Mr Nath has cautioned that worse is to come. | |
| There are of course those who argue that the rupee should be allowed to find its own level, and that everyone should adjust to changes in the currency market, but they are in a small minority. So the real choice before the government is to try and drop the rupee's value or work out an export benefit package. The only way to lower the rupee's value is for the central bank to buy dollars. But is this a feasible policy, when last year's capital account surplus was $45 billion, and the January-March quarter saw a current account surplus as well? And if the RBI does manage to devalue the rupee, what will be the costs of such an operation? Since the RBI will have to sterilise the flood of rupees that it will unleash on the market when it buys dollars (the alternative will be to risk inflation), this will involve an interest cost, which will be the difference between what the RBI earns on its dollar deposits and what it pays the banks that buy its sterilisation bonds (with the tab being picked up by the government through the Budget). There is then the cost that the economy will pay by way of more expensive imports, when the RBI tries to lower the rupee's value. Whether the costs outweigh the benefits is an issue for debate, but it is obvious that any policy of deliberately undervaluing the rupee distorts economic signals and could make the problem worse by encouraging further inflows in the belief that the RBI's policy will not be sustainable. Indeed, the rupee's recent climb is precisely because the RBI felt it could not sterilise the inflows fully. |
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| A less distorting method, and one that the finance minister and commerce minister seem to be working towards, is a specific export package of concessions and benefits to neutralise some of the impact of the rising rupee on exporters. The duty drawback and duty entitlement passbook (DEPB) scheme offer a way out, especially since state-level taxes that add up to a tidy sum are not rebated at the moment. However, the last thing the country needs is a re-birth of permanent export subsidies, which were abolished when the rupee was devalued in 1991. So it will be important to have a sunset clause in any relief package that is worked out; exporters should understand that they are being given only temporary sustenance until they improve their productivity levels and can compete without the help of crutches. |
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