The Hindu Business Line : For rupee's worth

The rupee has risen to a nine-year high and predictably exporters are worried that a climbing exchange rate of this sort can hurt their competitiveness and perhaps edge their products off global markets. They have asked the RBI to intervene and ensure the rupee moves within an `appropriate price band'. The RBI Governor, Dr Y. V. Reddy, holds that the central bank cannot base the foreign exchange policy on the interests of one or other section though it would not be insensitive to their interests. Such officialese hides the fact that the results of the central bank's concern about excess volatility in the exchange rate does benefit one section over the other unintended as that consequence may be.

For nearly a decade the RBI's intervention in the forex market kept the rupee low. The fact that India's exports rose at a steady clip of 25 per cent a year over the past four years owed as much to a depreciating rupee as to a growth in capability. On the face of it, the RBI's reluctance to `sterilise' the surge in capital inflows over the last four months and thus let the rupee rise will hurt the exporter. But it need not. The baneful impact of a higher rupee can be offset by a falling inflation and most pertinently by a shift in the basket of export goods and services. Apart from software and allied areas, India's exports are still dependant on goods that are extremely sensitive to price and shifting tastes — textiles and gems and jewellery that between them account for a third of merchandise exports. It is time India diversified into export of products and services less vulnerable to price, by leveraging the country's pool of scientific and engineering talent. Over the years Japanese exporters have overcome a rising yen and retained their competitive edge in the global market through innovation in products and services. While the potential has been recognised here too and some exports are under way in these technology-led segments such as pharmaceuticals and telecom equipment, policymakers need to look at strategies that would boost such exports in a big way.

For its part the Government must clear the roadblocks that still prevent export diversification. An enforceable intellectual property and patent regime conforming to global standards would enable innovation. Infrastructure barring telecommunications is an old bugbear and takes its toll in terms of high transaction costs. Controlled inflation, favourable exchange and interest rates do play a part in the export effort but the economy has necessarily to anticipate market trends and produce world quality services and goods.

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