Protecting the 'real' sector

With the Reserve Bank being forced to give up its old policy of buying up dollars in its effort to hold down the exchange value of the rupee, all economic players in the country have now to reckon with the possibility (not yet a probability) that India will have a strong currency in the foreseeable future. This affects domestic producers who have to face competition from imports, and the threat of imports""and both elements could act as downward pressure on prices, as new sources of supply become viable when the rupee climbs. And it affects exporters, whose margins get squeezed as they get fewer rupees for every dollar that they earn. Already, there is widespread scepticism with regard to the export target set for the year, at $160 billion, implying a growth rate of 28 per cent over last year. To the extent that the target is expressed in dollars, the rupee's rise against the US currency is not a direct factor. But at a time when world growth in trade is slowing, this would have been a daunting challenge in even the best domestic circumstances. With a stronger rupee, the challenge becomes all the greater.

The question has to be addressed: how do economic players deal with this challenge? There is only one answer: higher productivity all around, in order to make the system as a whole more competitive, and in that way to neutralise the effect of a rising rupee. That translates into more economic reforms, because the systemic efficiency issues are more pervasive and therefore more important than firm-level changes in productivity that individual exporters may be able to achieve. If the majority of India's exporters are generating their own electricity, at Rs 6 per unit, instead of getting power from the grid at half the cost, that is a needless cost. Higher labour costs because of the absence of flexibility in the labour market are another avoidable disability. Higher bank charges and interest rates constitute yet another problem.

Port charges from India remain higher than from most competing countries because India's ports are still mainly trans-shipment ports that have to use Dubai and Colombo as their cargo hubs. Transport efficiencies within the country have not been fully achieved because the procedural issues that hold up trucks at inter-state crossings add enormously to the time taken to get goods to ports, and neutralise to a good degree the benefits of the better highways that have been built. The cold chain that will facilitate agri-product exports is not yet in place. The irrational policies governing the organised segment of the textile industry have prevented the country from reaping the benefits of the opening up of world trade in an area where India should be a natural beneficiary. This list can be extended almost ad infinitum, but the point should be clear: the answer to a rising rupee should be rising productivity.

It is important also to recognise that while India's deficit on the current account (comprising trade in both goods and services) is within manageable limits at less than 2 per cent of GDP and easily covered by capital inflows, there is a growing and now yawning deficit on trade in just goods. From modest levels, this trade deficit has climbed to the region of 7 per cent of GDP, which is probably a record never reached before. It would be foolish to ignore this gap merely because software exports and remittances from people of Indian origin overseas help close it. The commodity base of the economy has to remain strong and competitive, because it has vital links to agriculture and manufacturing, which employ the majority of people in the working age group.