Strengthen exports, not just rupee

Updated: Jun 9 2014, 09:55am hrs
External earnings for India comprise of (1) merchandise exports, (2) services exports, and (3) remittances or transfers from non-resident Indians (NRIs). These external earnings have in aggregate surged around six times from $23 billion in Q1FY04 to $135 billion in Q3FY14. On an annual basis, external earnings increased from $115 billion in FY2003-04 to $520 billion in FY2012-13. During the same period, merchandise goods and services exports increased five times each, and remittances increased three times. Also, since FY08, all three components have almost doubled.

External earnings as a percentage of nominal GDP moved up from 20% in 2004 to its peak of 31% by September 2008. It bottomed out with a low of 23% in March 2010 and is now close to its previous peak (chart 1). Exports, both merchandise and services, took off after 2004 (chart 2) with a sharp dip during the 2008 global financial crisis. The annual growth in total external inflows smartly recovered in 2010 before tapering off again by the end of 2011.

The latest data in Q3FY14 shows that the share of services export in total has increased to 28% from around 17% in the 1990s, while that of merchandise export has moved down to 59% from its highest level of 77% in 1991. Even though the absolute growth in remittances since 2000 has been substantial (450% from $12.3 billion in FY1999-00 to $67.7 billion in FY2012-13), its share in total external earnings has come down (from 18% to 13% during the same period) and perhaps needs a review to bolster them. According to a World Bank report, India topped the list of countries receiving remittances from overseas workers at $70 billion in 2012-13 followed by China with $60 billion and the Philippines with $25 billion.

External Earnings

Interestingly, Indias share in world exports, which was higher than Chinas in 1953, declined thereafter and reached a mere 0.8% in 2002. Since then it has doubled to 1.6% in 2012 but still far below Chinas, which, in the meantime, has established itself as worlds leading exporter with a share of 11% (World Trade Organisation data). The absolute size of Chinas goods export in 2012 was $2,049 billion compared to Indias $306 billion in 2012-13.

But Indias share in world commercial services exports increased significantly from 0.6% in 1990 to 3.2% in 2012, with its rank among service exporters improving from 22nd to 7th. India managed to cash in on its comparative advantage and became one of the top exporters of world computer/software services with a share of 22% in 2011. Software services account for almost 45% of Indias total services exports.

In China, during the period of high growth, net exports (exports minus imports) contributed more than 7% to GDP growth, while in India, contribution of net exports to GDP growth during 2004 to 2011 was on average negative 1.5% (India has a trade deficit as against Chinas trade surplus). This must change if India has to achieve its growth targets and, more importantly, the critical objective of generating 12 million jobs every year for the next 10 years.

Merchandise exports

India has diversified its export destination away from advanced to emerging economies in the last decade. It also diversified its export basket from traditional manufactured products to engineering goods. Changing product composition within our export basket and moving up in value chain helped Indian exporters to compete in new markets.

Manufactured products constitute the largest share of exportsaround 61%, followed by petroleum products at 19% and agriculture products at 15%. However, within the manufactured products, the composition has undergone a significant change from traditional, labour-intensive products like textile and leather to more modernised, mechanised engineering goods like automobiles, auto parts and capital goods.

External earnings performance

Indian rupee, which was range-bound around 46 per dollar in the post-Lehman crisis period, started depreciating from 2011 reaching a low of 57 per dollar by September 2012 on both global and domestic cues.

With RBI quite inexplicably adopting a stance of defending the rupee in July 2013, it plummeted to a record low of 68 per dollar by end August 2013 as the market moved against RBI. This episode saw India emerge as the most vulnerable among the fragile five emerging economies to the US Feds tapering of its programme of quantitative easing, in line with growing signs of economic recovery in the US economy. Some rapid and strong action together by RBI and the government to reduce gold imports and hike interest rates combined with the use of RBIs swap facilities helped avert the rupee from going into a free fall. With the sharp reining in of the current account deficit (CAD), the rupee made up some lost ground and recovered to around 60 per dollar by January 2014 and further to 58 to a dollar by May 15, revealing a steadily appreciating trend.

An appreciating rupee brings cheer to those who see depreciation as an unacceptable debasing of the currency and to the elite whose consumption basket is more import-intensive, comprising as it does of imported goods and services like foreign travel, higher education, etc. But the question is whether an appreciating and overvalued currency helps promote exports, which are generally more labour-intensive, and allows the economy to take advantage of external demand to boost growth rates

(This is the first of a two-part series)

Rajiv Kumar is senior fellow and Geetima Das Krishna is senior researcher at the Centre for Policy Research, New Delhi