The Hindu Business Line : Yuan revaluation — No big advantage for India

India may not really benefit from the yuan revaluation. This is because of its poor competitiveness in the international market, domestic policy constraints, and limited overlapping of export products with China. New Delhi must address such issues as the inflexible labour laws, high cost of business infrastructure, inefficient logistics and, of course, corruption.

THE yuan appreciation has happened, after months of speculation and intense pressure primarily from the United States. The yuan had been pegged in a narrow band around 8.28 against the dollar for over a decade. While China has not undertaken a significant revaluation in one go, a small appreciation of 2 per cent will probably calm the pressures.

Emerging Asian economies including India as well as the Chinese trade partners too wanted an appreciation of the yuan. This is because the artificial pegging of the currency has increased significantly the export competitiveness of China vis-à-vis other countries.

This has not only enabled China build up a huge trade surplus with the US but also led the latter to experience huge economic imbalances such as a mounting trade deficit. Besides China has accumulated massive foreign exchange reserves ($711 billion till June). Whether India is able to capture the advantages of the yuan revaluation depends on such factors as the export basket of India and China, the price elasticity of demand for exports and the relative export competitiveness. Is the export basket of China same as that of India?

India and China have about 75 per cent dissimilar export products. They compete in third markets with a roughly one quarter of overlap of products (IMF paper on Crouching Tiger, Hidden Dragon: What are the Consequences of China's WTO Entry for India's Trade? by Cerra, Rivera, and Saxena, 2005). Even for these 25 per cent common export products, the price elasticity of demand has to be high so that a small appreciation of the yuan (only 2 per cent) can offer India an opportunity to increase its export competitiveness and, therefore, help to harvest the benefits.

But the important question is how competitive is India in the export markets vis-à-vis other countries. To answer this, let us look at India's export competitiveness in the recent past. A country's export competitiveness is conditioned by a number of factors — price, quality, credit time, delivery, post-sales service, and so on.

Of these, price competitiveness is a major determinant of purchase decisions especially for undifferentiated products or even for differentiated products targeted at lower market segments. A country's export price competitiveness is broadly determined by its exchange rate in relation to that of its major competitors.

The export competitiveness of India is analysed by using the dollar-based export unit value (price) indices of important competitors such as Indonesia, Korea, Pakistan, the Philippines, Singapore, Sri Lanka and Thailand. Export unit value indices are designed to provide means of measuring change in the average unit value of commodities exported. The objective is to measure the export competitiveness of India vis-à-vis competitors by comparing the relative indices of export unit values.

The relative indices of export unit values have been constructed by dividing India's export unit value indices with the respective countries' export unit value indices. A value of lower than one would show that India is more competitive vis-à-vis other countries in a particular year while a value of greater than one would show the opposite.

As is clear from the Table, of the seven competitors, India has enjoyed relative competitiveness over five or more countries before 1997. India appears to have seen higher competitiveness due to lower export prices relative to its competitors during 1995-1996.

However, since 1997, India appears to have lost its export competitiveness. The number of country/countries over which India has experienced competitiveness has come down to one in 2002 from as high as six in 1996. Relative indices of unit value of exports are higher than or equal to one for four or more countries between 1997 and 2002 (latest data available for India). The export prices of India might have risen at a faster rate than most of the countries in the sample during this period. A mix of demand and supply side factors are probably behind the uncompetitiveness of India vis-à-vis other countries.

The Indian rupee is appreciating every year by about 4-5 per cent for the last two years. Since January 2005, the rupee has strengthened and it has been hovering at around 43.5 against the dollar.

It is likely to gain in the years to come by more than two per cent annually if the famous BRIC report is to be believed. This appreciation of rupeepost 2002 period has probably eroded India's relative export competitiveness to some extent in the international market.

It is true that India is not competitive across the countries as well as the years particularly after 1996. There are clearly countries within the sample that are very competitive as a result of their favourable export prices.

Notable amongst these are the Philippines, Indonesia, Korea and Singapore. These countries have enjoyed competitiveness relative to India in the recent past on account of lower unit value of exports.

The Indian economy is not competitive for several reasons. Such constraints as outdated or inflexible labour laws, reservation for the small-scale sector, high cost of real-estate and business infrastructure, high cost and irregular electricity, high transaction costs, inefficient logistics and of course high cost because of delays, bottlenecks and corruption need to be attended urgently to be more competitive globally.

In short, India may not really benefit from the yuan revaluation. This is due to lack of its competitiveness in the international market, domestic policy constrains, and thinner overlapping of export products with China.

Importers will perhaps look for other origins such as Indonesia, Korea, the Philippines and Singapore.

(The author is an economist with CRISIL. The views are personal.)

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