The rupee has appreciated at a staggering rate since early March 2007 with the currency value reaching around Rs 40.50 a dollar in recent weeks. The rupee has hardened not only against the dollar, but there is evidence of an increase in the rupee value in terms of euros as well. As against earlier bouts, it is now widely perceived that the current phase of currency appreciation will prolong at least over the medium term with the Reserve Bank of India abstaining from the purchase of US dollar in the foreign exchange market to moderate inflationary tendencies. The measures that are required to tide over such an adverse situation should necessarily be medium term in nature. Any short-term counter-cyclical measures would fall short of expectations.
The hardening of the rupee, is expected to impinge on export performance by making them uncompetitive. Apart from waning export competitiveness, export profits are expected to decline. As a result, there will be fall in export orders and hence, job losses. The small and medium traders are likely to be the worst hit. To counter the negative impact of rupee appreciation, the Union Minister of Commerce & Industry recently recommended a package of measures. On the face of it, these measures seem necessary to tide over the adverse consequences of a hardening rupee.
An in-depth understanding would show that the recommended package of counter-cyclical measures would not address the observed problem, which will necessarily persist over the medium term. The recommended increase in the duty drawback rates will not work to make exports price-competitive as the export promotion scheme has lost its importance in a situation of greater trade openness and declining tariff rates. The scheme of mandated export credit disbursement targets of scheduled commercial banks and reduction of ECGC premia rates only addresses the supply side of the problem without attending to the demand side. Providing tax incentives does not necessarily reveal competitive strength of the exporters, but in a way conceals the structural weaknesses. The only measure that would necessarily work as an incentive for the exporters is the re-introduction of interest on EEFC accounts. However, such a measure is much more general and does not essentially address this specific problem of export earnings instability and related job losses. To me, the exporters? organization has bargained for measures that are very general.
The premise of all these export-enhancing measures is necessarily based on the price responsiveness of exports. Even though an overwhelmingly large body of studies point to India?s exports being price responsive, there is no consensus on the issue. Studies have very often found that post-reforms export performance does not depend on relative prices as turning points in export performance very often do not match real exchange rate movements. Further, relative prices are found to help in accessing markets only in phases of growing world demand. Hence, the basis on which these measures are recommended is itself flawed.
Even if exports do respond to prices, it is for a limited range of traditional manufactures. For non-traditional manufactures, which are necessarily medium and high technology based, non-price factors like technology and productivity, infrastructure, and marketing play a vital role in export promotion. Further, exporters mostly encounter procedural bottlenecks thereby incurring relatively high transactions cost. The same is true for commercial services as well. On the whole, the current problem is deep-rooted and its solution cannot be restricted to certain short-term measures. Even if the commerce ministry is aware, these measures are not sufficient to address such deep-rooted problems of inefficiency and various kinds of bottlenecks. The package of measures that is taken recourse to does not even address the problem. The best way to counter this problem would have been in terms of temporary counter-cyclical payments to affected exporters on the one hand, and on the other, address structural issues such as improvements in technology and efficiency, infrastructure development and reduction in transactions costs.
?The writer is associate professor in the department of economics, Jadavpur University, Kolkata
