Beginning to hurt

There was little doubt that the rupee appreciation of the last four months would have a significant impact on both exports (slowing) and imports (accelerating). The trade figures for June, released by the ministry of commerce and industry on Wednesday, provide concrete indications of the magnitude of the impact. In dollar terms, exports grew by about 14 per cent over June 2006, respectable but significantly slower than the rate of growth of the last few years, when the exchange rate changed little. Growth during the April-June quarter was a little higher, at around 18 per cent, but the pattern clearly indicates deceleration as the impact works its way through the system. In contrast, imports grew by over 36 per cent in June and by about 34 per cent during the quarter. But this is only part of the story. If oil imports are excluded, the rest of the import basket grew by over 50 per cent during the quarter, with a visible acceleration to 52 per cent in June.

The true impact as far as the viability of export businesses is concerned, however, is seen in the growth of exports in rupee terms. In June, these grew by less than 1 per cent; growth during the quarter was less than 7 per cent. In effect, the top line of the domestic export sector has stagnated, while it is clear that costs continue to increase. Those sectors that import a significant proportion of their input requirements are protected somewhat, but for those that don't, this is an outright loss. Additionally, with the growth rate of non-oil imports accelerating, domestic producers who compete against them are also being impacted. The net effect of all of these developments is a doubling of the trade deficit""$7.3 billion in June, compared with $3.6 billion in June 2006; and over $20 billion during the quarter, compared with about $11 billion during April-June 2006.

From a macro-economic perspective, none of these developments is necessarily negative. The stated intent of monetary policy over the last few quarters has been to cool the economy; slowing exports do contribute to that objective. Neither is the widening trade deficit a matter for concern in and of itself; the country's surplus on trade in invisibles (like software) reduces the gap, and the capital inflows are currently more than adequate to offset the current account deficit that remains""hence the accumulation of dollars. If these flows decline significantly, the rupee will depreciate if allowed to by the authorities, and the deficit will automatically narrow.

The negative consequences of appreciation, therefore, are seen in the asymmetric impact it has across sectors. India's manufactured exports are heavily concentrated in relatively employment-intensive industries; consequently, for every rupee worth of lost exports, the threat to jobs is higher than it would be for a similar decline in output elsewhere. But it is also equally valid to argue that competitiveness based predominantly on an undervalued exchange rate is inherently fragile; to be enduring, it needs to be driven by increasing productivity and declining costs. Whatever the short-term measures the government has taken or will take to offset the rupee appreciation, it should not delude domestic producers into believing that this appreciation is only a temporary phenomenon. It would be far more effective for them to be told in no uncertain terms that, whichever way the rupee moves, their survival depends on their improving on current efficiency levels, because the outlook just now is that the rupee will continue to appreciate. In improving productivity, both the producers themselves and the government have a role to play. Too much debate these days is on the rupee's movement, and too little on what needs to be done to improve productivity.