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Harish Damodaran

New Delhi, Oct. 18 When a currency becomes stronger by the day abroad while continuing to get weaker at home — as is indeed happening to the rupee — exporters are faced with a double-whammy.

On the income side, every dollar worth of exports fetches him fewer rupees with each passing day. At the same time, on the expenditure side, the same rupee earned buys him lesser quantity of goods and services back home.

This is precisely what a combination of exchange rate appreciation and inflation has been doing to the rupee, making it a currency that is a ‘domestic lamb’ and an ‘overseas tiger’.

Since the last one year, the rupee has gained about 14.5 per cent over the dollar and 5.1 per cent against the pound sterling, while marginally strengthening vis-À-vis the Euro.

Effectively, every dollar earned now is giving the exporter Rs 5.7 less compared with last year at this time. On the other hand, with the year-on-year consumer price inflation ranging from 6.4 per cent for urban non-manual employees to 8.8 per cent for agricultural labourers (August numbers), even the fewer rupees earned command less purchasing power at home.

For an exporter, the best antidote to inflation is devaluation. Rising domestic production costs do not matter beyond a point, so long as it gets offset by higher earnings in local currency for every unit dollar of goods exported.

Thus, the extra rupees spent on the expenditure side are compensated through higher rupees earned per dollar on the income front. This is what has been happening, for instance, in Pakistan and Bangladesh.

In Pakistan, the consumer price index has risen 6.5 per cent year-on-year during August, while wholesale prices have gone up by 8 per cent. Inflation has similarly been averaging 7-8 per cent in Bangladesh.

But both the Pakistani rupee and the Bangladeshi taka have fallen against the Euro and the pound, while ruling stable vis-À-vis the dollar (and certainly not appreciating unlike the Indian rupee).

The impact of all this on relative competitiveness cannot be lost, especially in sectors such as textiles or even agro commodities like basmati rice and sugar. During 2006-07, Bangladesh’s textile exports amounted to $9.21 billion, including $4.66 billion of woven garments and $4.55 billion of knitwear. Pakistan’s corresponding shipments totalled $9.94 billion.

India’s exports of textile and textile products during 2006-07 were estimated at $17.01 billion. While this may be higher in overall terms, the threat of rising competition from neighbours — accentuated through unfavourable exchange rate movements — cannot be ignored.

Even within textiles, export of ready-made garments from India, at $8.70 billion, is already lower than the $9.21 billion of Bangladesh.

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