An exporter needs to spend just around R10,000 to ship out a container of goods from the JNPT port in Mumbai to Shanghai, but he will have to cough up as much as R36,000 to send the same volume of goods from Ahmedabad to Mumbai by land, thanks to exorbitant logistic costs, says Naishadh Parikh, the chairman of the Confederation of Indian Textile Industry and also a director at Arvind Mills.
Since many manufacturing centres are far away from ports, the transportation and other expenses drive up India’s cost to export, eroding its competitiveness substantially in the global market, compared with other Asian peers like China, Indonesia and Malaysia. And this also explains why a rupee depreciation alone won’t completely nullify India’s woes on the export front over a longer term unless the country effects massive structural reforms to improve overall trade competitiveness, say exporters and analysts.
Still, exporters across sectors (ranging from textiles, gems and jewellery to engineering goods) that FE spoke to argue that since removing infrastructure bottlenecks and keeping transportation costs by road or rail at reasonable levels can only be done over a period of time, the government must weaken the rupee — which they feel is overvalued — immediately to reverse a slide in outbound shipments urgently. They support the commerce ministry’s contention that the rupee should be kept at a fair value.
Sanjay Budhia, co-chair at the CII national committee on international trade and exports, even pitched for an 8-9% devaluation of the currency to make exporters competitive.Some officials of leading textile and garment companies like Alok Industries, Vardhman Group and Gokaldas Exports say a rupee depreciation of say, 5%, will help drive up the sector’s exports by 10%. This is because the textile and garment sector is less dependent on import contents, and mostly rely on domestic sourcing.
Some analysts, however, have advised caution over any such move to devalue the currency.
“With global demand remaining subdued, a weak currency would do little to boost exports. In fact, we find that that every 1% depreciation in the real effective exchange rate (REER) raises export growth by just 0.9 percentage point in the same quarter, whereas every 1% of global GDP growth drives up export growth by 2.7 percentage points with a lag of one quarter,” said Sonal Verma of Nomura.
So a pick-up in the economic growth in the key markets is more crucial. A weaker rupee would also drive up imported inflation, creating upside risks to the RBI’s mandated inflation target of 4%+/-2%, which is already under threat due to upcoming inflationary impulses from the GST and expected pay commission allowance increases, she said.
This apart, analysts say since the repayment of around $26 billion of NRI deposits is due up to December, and any artificial devaluation of the rupee may spook their confidence and lead them to withdraw their money instead of re-investing them.
Also, the share of import-intensive export sectors, such as gems & jewellery, chemicals and transport equipment and petroleum products, has risen from 35% in 2000 to around 45% in 2015. Therefore, for a large part of India’s export basket, a weaker currency would drive up imported input costs, offsetting the intended benefits of a weaker rupee in export competitiveness. As such, India is a net commodity importer.
Yes Bank chief economist Shubhada Rao said: “We estimate that the ‘price effect’ has contributed significantly to the sharp reduction in exports/imports.”
The relative underperformance of India’s trade can be explained by domestic structural issues such as the choice of export-product mix and predominance of low-value exports in the trade basket vs peers, she said.
While export volumes have risen by 2.1% y-o-y in the April-July period of this fiscal, export prices dropped 5.4%, thanks to falling global commodity prices.
Moreover, with many key nations facing low inflation, higher imported inflation would drive up India’s inflation differentials with its trading partners, resulting in an appreciation of the real effective exchange rate, partly offsetting the impact of a weaker currency. “Overall, in our view any attempt to artificially weaken the rupee would hurt macro-stability, by driving up inflation and triggering capital outflows, and would have little benefit for exports,” according to a Nomura report.
According to the RBI data, the real effective exchange rate (REER) index appreciated by around 14% between September 2013 when Raghuram Rajan took over as the central bank governor and August this year.
EEPC India chairman T S Bhasin said the rupee was trading around 67 to a dollar in July this year, against 63.38 to a dollar in July 2015, depreciating by less 6%. The CPI inflation for July this year was above 6%. “So, in a way, rupee is over-valued in real terms, and this needs to be corrected,” Bhasin said.