Revaluing the renminbi and aligning the exchange rate of the Chinese currency with the market trends has been a contentious issue for some time. The developed economies that have consistently pushed China to allow the renminbi to appreciate, in line with the huge surplus in the Chinese balance of payment accounts, hope that market-driven rates will help bring down the trade imbalances by reducing the growth of Chinese exports and increasing that of their imports. The Chinese, on the other hand, fear that an appreciating renminbi will hit their exports, push up imports and reduce employment.
The Chinese fears of currency appreciation are largely based on the experience of Japan more than two decades ago, when a sharply appreciating yen?value of which increased by more than 50% in the latter half of the 1980s?hit Japanese exports. But the Indian and global experiences in the last few years are more pertinent examples of how flexible exchange rates boost trade prospects, both in terms of quantity and quality.
An appreciating rupee has always been a bugbear to Indian exporters, who usually use their clout and manage to wrench new export concessions from the government whenever the rupee appreciates for prolonged periods or at an accelerating pace. However, the reality is that export growth has more than doubled under flexible exchange rates, especially since the middle of the decade, when the rupee started appreciating, and imports have risen much slower that exports.
Although India had shifted to a dual exchange rate in March 1992 and to full market-based exchange rate in February 1993, the immediate impact on exports was minimal as the rupee continued to steadily depreciate for almost a decade until 2003-04 when it touched a peak rate of R48.4 per dollar. Since then the rupee has appreciated in six of the next eight years with the exchange rate now hovering around R45 per dollar.
However, the flexibility in the rupee exchange rate?with the value fluctuating in the -15% to +5% range in the 2003-04 to 2010-11 period?has seen Indian merchandise exports pick up by an annual average rate of 21%, more than double the 9.5% growth averaged in the preceding eight years. The rise in imports was much slower, with inflows growing at 23.7% in the last eight years as against the 13.5% increase in the previous eight.
But rather than volumes, the more substantial impact of the new found flexibility of the rupee was on the structure of exports. The flexible currency, in fact, has helped improve India?s export basket, with the share of high value products increasing much faster than in the previous period. Engineering goods have, thus, replaced textiles as the largest export product, with the share of engineering goods in merchandise exports going up from 19% to 26% between 2003-04 and 2008-09. The second largest export product now is petroleum products, with its share almost trebling from 5.6% to 15.9% during the period.
Share of the previously dominant traditional export products like textiles has almost halved from 20% to 11% during the period while that of agriculture products has gone down from 11.8% to 9.5%. More flexible exchange rates have obviously helped exporters move up the value chain by focusing on goods where India?s skilled workforce confer a trade advantage as distinct from traditional exports where the regulatory regime impinged on the competitiveness of labour-intensive exports. The total trade numbers also show that the greater flexibility in the exchange rate has helped push up overall openness of the Indian economy, with the share of goods traded going up by more than a third from 24.1% of the GDP in 2003-04 to 41% of the in 2008-09.
The larger global picture also validates the importance of flexible exchange rates. The most recent numbers for 2010 show that as global exports shot up sharply by 22%, after falling by 23% in the global slowdown of 2009, the pick up was quicker in the economies with more flexible currencies. For instance, the global trade recovery in 2010 helped the US push up its merchandise exports by an impressive 21% in 2010, which is around three times the general trends rates and double the rates achieved in 2008, just before the slowdown. In fact, the growth of merchandise exports in the US was much more substantial that in the China, despite its relatively more stable currency. Chinese exports went up 31%, which was just about double their trend rates.
The US is no exception. The numbers, in fact, show that other countries with more flexible exchange rates registered a faster recovery of exports than in China. Countries where the growth of merchandise exports in 2010 was more than triple the trend growth rates include Canada, Mexico, France, the UK, Italy, South Africa and Japan. In other countries like Brazil, Germany and the Netherlands, the pick up in exports was more than double the trend growth rates. So, it is now for China to join the dots and opt towards more flexible exchange rates.
p.raghavan@expressindia.com