Currency appreciation has a two-pronged effect on the external sector: First, imports become cheaper, thereby increasing the competition that domestic firms face. Second, appreciation makes domestically produced goods and services more expensive in foreign markets, thereby making it more difficult for exporters to compete against other origins.

As a corollary, exporting and import sensitive firms (as distinguished from firms with import intensive operations) are adversely impacted by an appreciating currency. The results are evident in the decline in exports and loss of jobs. A major portion of India’s exports is invoiced in dollars and the appreciation of the rupee is going to have a definitive impact on Indian exports.

Perceptions and expectations of Indian business on the future of the rupee vis-a-vis the dollar, according to various surveys, are not unanimous about the this trend sustaining. A survey by the PHDCCI of its exporter-members reveals a general optimism about the dollar bouncing back strongly. Only 10 per cent of the respondents thought the rupee could continue for a long term, of two-three years.

But what the Indian exporters have represented to the government is that it is hurting profits and is going to demand business reorientation. The response mechanisms, as can be expected, varies with the size of the business; SME exporters appear to be disadvantaged in these efforts.

So far the contractionary effects on exports are not visible, but can be expected with some lag. The cumulative value of India’s exports for the period April 2006-March 2007 was $124.6 billion against $100.6 billion during the previous period, indicating a 23.88 per cent growth. The cumulative value of imports in April 2006-March 2007 was $181.3 billion; this was higher than the imports valued at $140.2 billion during the corresponding period in the previous year. However, some reports mention a loss of 4-5 million jobs in the past three months and express doubts about meeting the export target of $160 billion for 2007-08.

To assess the full impact of exchange rate movements on trade flows, several indicators need to be studied such as the real effective exchange rates, the movement of relative exchange rates of competitors, and the price elasticity/sensitivity of products.

The arithmetic for sustaining exports in a situation of an appreciating currency in which trade is invoiced involves generally three broad measures — hedging against currency risks, switching currency options, and improving volumes to take care of transactional risks.

The persistent appreciation or undervaluation of trading-partner currency would call for more ‘structural’ changes to improve competitiveness. Each of these changes has differing execution periods. It may be useful, therefore, to distinguish between extremely short-term measures to medium-term ones with varying response time for their effects on trade volumes.

What do other countries faced with an appreciating currency do to protect or assist their exporters? The US, for instance, reviews the trade deficits and exchange rates and negotiates either bilaterally or through multilateral forums for adjustment in the exchange rates of its trading partners.

Under the 1988 Omnibus Trade and Competitiveness Act, the Secretary of the Treasury is required to analyse the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the dollar for preventing effective balance of payments adjustments or gaining competitive advantage in international trade.

The Treasury Secretary is required to undertake negotiations with those ‘manipulating’ countries that have material global current account surpluses and significant bilateral trade surpluses with the US. The negotiations between the US and its trading partners, Japan and China, for revaluation of their currencies, the yen and the remnimbi/yuan over various points of time, are part of America’s global strategies.

In the case of other developing economies there are internal initiatives by the state and the financial sector to help exporters tide over the problems of an appreciating currency.

The Philippines peso appreciated by over 14 per cent in the 12 months to June 2007, the next month, the Development Bank of Philippines (DBP), announced a foreign exchange insurance scheme and a forward foreign rate protection scheme to facilitate hedging by exporters coping with an appreciating peso.

In June, New Delhi announced a slew of measures to mitigate some of the negative impact of currency appreciation. These pertain to rupee cost reduction measures. These include the enhancement in the Duty Entitlement Pass Book (DEPB) and Duty Drawback rates by 5 per cent and a reduction in the rate of interest on pre- and post-shipment credit to 6 per cent. Exchange Earners’ Foreign Currency (EEFC) accounts will be made interest bearing.

Service tax exemption or refunds for exports announced in the Foreign Trade Policy 2007 would be notified without any delay.

Further, all arrears of Excise Duty and Central Sales Tax reimbursement are to be cleared shortly. The Export Credit and Guarantee Corporation (ECGC) is expected to drop its premium rates by up to 10 per cent to make exports more competitive. Scheduled commercial banks may be mandated to meet 15 per cent export credit disbursement target.

The panacea for short-term currency exposures and long-term exchange rate appreciations need to be distinguished. In a situation of fluctuating exchange rate trends, policymakers could consider the creation of a pool of funds, out of collections from exporters, from out of profits on account of exchange rate variations in a depreciating currency scenario — that is, in the Good Times.

These funds can be used to provide assistance to exporters when the currency appreciates. This pool of funds can be used to provide short-term relief to exporters by mitigating the loss in profitability. The assistance to tide over temporary drop in profits may be needed more by the SME exporters who generally cannot afford hedging.

This assistance could be interim until structural measures that improve competitiveness, identify alternative markets, secure more buyers or more volumes are put in place.

Enhancing competitiveness would require improvements in processes, raw materials sourcing, technology infusions, capital investments, product innovations, all of which would be medium-term measures. In the meantime, why not let Good Times help out a little during the Bad Times?

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