There is a seemingly perverse sense of jubilation in certain quarters over the rupee’s (INR’s) free fall. Exporters do get that much more rupees per US dollar. In fact, export-led growth on the back of a weak domestic currency is a recipe first perfected by Japan and then followed by China with resounding success.
The moot question is whether it would work for India which, admittedly, is not an export-led economy but rather an import-dependent one, as reflected in a frightening current account deficit, upwards of 4 per cent of the Indian GDP.
An exporter may send a blessing skyward with every fall of the INR, but importers led by Indian Oil Corporation, on the contrary, fume and sulk in exasperation. It is axiomatic that for an import-dependent economy, devaluation of the domestic currency virtually amounts to importing inflation, especially if the imports are of the unavoidable variety, such as oil, in the Indian context.
The Chinese model of export-led growth is premised on weak currency and near-starvation wages. Both are now under challenge, what with the Western world periodically threatening it with retaliatory measures if the perverse policy of artificial devaluation of Yuan is persisted with, and workers rising in revolt and getting a substantial hike in wages.
That India is not being helped by the weak INR is apparent from the fact that, according to the official figures released recently, exports for April-July 2012 fell by 5.06 per cent vis-à-vis the exports for the same period last year. A weak domestic currency aided by low wages cannot catapult a nation into an exporting power because the economies of the US and Europe are still in a comatose state, and their imports are falling, including that from the redoubtable China.
Services occupy pride of place in the Indian scheme of things. Employees in the IT-related services industry, however, would not settle for lower wages, unlike in the manufacturing sector where availability of contract labour, a la the Manesar plant of Maruti Suzuki, gives it the much-needed elbow room to lower wages. So much so, the much-vaunted IT-related industry in India is willy-nilly taking flight to competitor destinations such as the Philippines in a spirit of joining the tormentors where you could not beat them.
To be sure, lower wages alone are not the attraction. Finicky foreigners take more kindly to the Filipino accent rather than the Indian one, thus vindicating the reality that in services more than in goods, importers are more conscious of quality.
Furthermore, importers of services are quick to spot the windfall accruing to the exporters out of weakening of their domestic currency and demand their pound of flesh. Unlike the Chinese government, the Indian government neither has the stomach nor the capacity to foot the subsidy bill that consists in giving more Yuan per dollar to the exporter in exchange for his reducing the export price.
A section of the commentariat in India is advocating Indian exporters stepping into the breach left by the Chinese thanks to increase in wages there and the western nations’ pressure to cease and desist from conscious devaluation, little realising that it is easier said than done, given the fact that in India too there is considerable upward pressure on wages and seething resentment, if not open rebellion, against contract labour.
Eschew me-too approach
A me-too-approach must be selectively adopted. Seeking to boost Indian exports through deliberate or fortuitous undervaluation of the INR, coupled with starvation wages, is ill-suited to India. We must pursue policies that suit us.
China’s ability to shock and awe in successive Olympics was thanks to the ‘hide your talents and bide your time’ slogan coined by Mao’s successor, Deng Xiaoping. Besides, China chooses the games it is going to compete in carefully without being a me-too. It shuns or relegates to inconsequence games, chiefly track and field events, it knows it has no expertise in, thanks to the physiognomy of the Asians vis-à-vis the sturdy build of the Africans and Caucasians.
We tried to ape the Chinese in the matter of Special Economic Zones but SEZs in India have made only a marginal improvement to our export thrust and have, by and large, turned out to be an alibi for land grab. Oil for infrastructure dawned on us much late in the day, in the meanwhile China had wormed itself into the hearts of several African nations, rich in oil.
As things stand, therefore, services remain our best bet, what with India being a service economy. That we have yielded ground to the Philippines and Vietnam is a commentary on our inability to guard our strengths and citadels --- a la the Indian hockey team that allowed rivals to score freely. The first-mover advantage is meant to be assiduously preserved and built on.
It is good that the RBI has stopped pursuing the sterilisation policy, under which it would intervene actively in the market to stabilise the exchange rate, releasing dollars into the market when INR weakened and mopping them up when the INR strengthened beyond the perceived comfort levels.
But the government should do more. Wasteful imports must be banned, FDI welcomed and FIIs tamed with a Tobin tax. Absence of any proactive action tantamounts to pursuing a tacit policy of devaluation through slow attrition and benign neglect.
(The author is a New Delhi-based chartered accountant)