The Hindu Business Line : Living with a stronger rupee

An economy that has witnessed high economic growth for four successive years can be forgiven for assuming the worst when the data show some slide-back in one or the other sector. The reaction was predictably gloomy to the trade data for July 2007, with the finger pointed at the rupee for the poor showing of exports the previous month. With the 18 per cent rise in dollar earnings and single-digit growth in rupee revenues, the performance that month pales in comparison with that a year ago, when exports grew at an annual rate of 24 per cent.

Data often hide more than they reveal. One cannot gauge, for instance, the extent to which exchange rates affect business prospects in global markets or how exporters must confront fluctuations in the exchange rates of competitors. That the currencies of Thailand and the Philippines have appreciated and that of China’s has not are part of prospective business. Exporters, therefore, must base their competitive advantage on more basic factors than a depreciating rupee, as many of them have done for years. The good news is that some sectors of the exporting community are doing just that, steering their ship to uncharted markets or, as the Information Technology firms are doing, shifting their service bases closer to client markets. Merchandise exports reflect two, more basic issues. First, a structural shift in the composition of the export basket pre-dates the rupee’s rise. In the five years to 2006, the share of primary products has stuck at 16 per cent while that of manufacturing has fallen to 65 per cent from 77 per cent. The share of petroleum products has risen substantially, from 4.2 per cent in 2001 to 14 per cent in 2006. With higher refining capacities, India has been able to bag a bigger slice of the market, riding on higher prices. Similarly, with better technology, engineering goods have also fared well, despite a rising rupee.

Second, policy initiatives instead of self-congratulation can do wonders for the other merchandise exports. Better port efficiency can reduce maritime costs by up to 15 per cent; other cost advantages would follow reductions in inland haulage costs and the long turnaround time at Indian ports. As for traditional exports such as textiles, gems and jewellery, that are notoriously cost-burdened and price-sensitive, the idea of clusters or hubs with amenities and labour practices such as those promised for Special Economic Zones would work wonderfully to make their market-share less rupee-dependent. Likely as not, the rupee may move southward in the coming months. But exporters should not count on it. Cleaning their backyard of costly legacies, with help from New Delhi is a surer way of ringing in better numbers.

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