Policy makers should react stronger to revive growth

The World Trade Organisation (WTO) says that the global trade growth rate will remain subdued in 2013 (at 3.3 per cent) after sluggish growth in 2012 (at 2 per cent) as European economies continue to struggle. These growth rate figures are much lower than the 5.2 per cent growth in 2011 and 5.3 per cent pre-crisis 20 year (1989-2008) average growth. The WTO forecast should help jolt our policy makers into thinking beyond just hoping for revival in global trade prospects to push up flagging export figures curb Current Account Deficit (CAD).

The commerce ministry is working on amendments to the Foreign Trade Policy that may take effect later this month. The announcements may include more duty credits for exporters, better deal for Special Economic Zones, easing some procedures for exports, some new schemes etc. These may show up the commerce ministry as doing something to help exporters but may not significantly help curb the rising trade deficit.

It is necessary to recognise that the productivity gains that the economy witnessed in the first decade of this century due to reforms in the telecom and financial sectors, the advent of internet, improved infrastructure, etc, have largely dissipated. The costs have significantly gone up, especially in the manufacturing and export oriented services sector due to various social sector schemes that put more money in the hands of consumers, pushing up inflation rates and wages. But, the rupee has not depreciated enough to discourage imports and maintain the competitiveness of exports.

Rajiv Malik wrote in this newspaper, last week, that "Indian policy makers forgot whether or not the rupee was misaligned. Capital inflows were financing wider current account deficit and hence it was thought that the rupee was appropriately aligned. But the need to offset the high inflation differential of India with its trading partners was ignored. Thus, the rupee became overvalued and needed significant depreciation beginning 2011 to correct its misalignment."

A V Rajwade, the noted expert in foreign exchange matters, says, "The real problem is the fact that, in recent times, our tradables sector has been rendered increasingly uncompetitive (from power plants to the colours we use during Holi), thanks to the real appreciation of the rupee; imports have grown much faster than exports and, hence, the galloping deficits. And the quality of capital inflows that finance them continues to deteriorate."

S S Tarapore, former deputy governor of Reserve Bank of India warns, "The Exim policy cannot be a substitute for prudent monetary, fiscal and exchange rate policies. In the absence of shock therapy for dealing with inflation and CAD, there would be a major upheaval, as India would eventually face the ignominy of international censure." His prescription is that the RBI should buy when there are capital inflows to prevent an appreciation of the rupee and refrain from selling when there are outflows. "The upshot is that the rupee would depreciate as it indeed should. At the margin, it is preferable to have an undervalued rupee rather than an overvalued rupee", he says. 

Clearly, the RBI policy of not intervening in the foreign exchange market, except to curb excessive volatility and the Government policy of looking only at ways to encourage capital inflows to finance the CAD, are not helping growth, as rising imports and falling exports keep our factories idle and more people out of jobs.

Email: tncr@sify.com