The appreciation of the rupee against the US dollar has hurt India?s exports, but there are divergent opinions on how to deal with the problem. Economists argue that exporters must come to terms with a stronger rupee through productivity gains; that there is no case for sops, as they are rent-seeking in character. Yet, the latter is precisely the temptation for policymakers.
Part of the problem is that associations like the Federation of Indian Export Organisations (FIEO) have not advanced firm evidence on how they have been affected by the 10.7% rise in the rupee last year. In an interaction with the Forum of Financial Writers, the only hard number provided was the growth in India?s exports by 8% in rupee terms and a higher trade deficit of $52.8 billion during April-November 2007, besides a statement that operating profit margins of export-oriented units have shrunk.
FIEO?s impact assessment was largely qualitative?of units in Tirupur closing down or of garment exporters migrating to Bangladesh. The truth is that a stronger rupee has not hit Indian companies across the board. As Raghuram Rajan, IMF?s former chief economist, points out in a recent interview, ?our IT companies are still making pretty serious profits; but wage rates are not going down there… Yes, there are some sectors that seem to be hurting, textiles, for example, but again we have anecdotal evidence.?
However, the PM?s Economic Advisory Council?s latest review of the economy observed absolute declines in exports of cotton yarn, fabric and made-ups, apparel, natural silk textiles and handmade carpets during the first five months of 2007-08. Exceptions were engineering goods and man-made textiles. ?In the majority of goods, especially those that formed an important component of the resurgence of Indian exports since 1991, there has however been erosion in export value when measured in Indian rupees,? it noted. Again, no across the board impact. While export profitability has fallen, relatively more competitive units were able to maintain business volumes. FIEO also admits that import-dependent companies with a higher net import to sales ratio showed good growth in sales and PAT.
What?s to be done? FIEO wants reimbursement of state taxes and levies, exemption from service taxes and much else. These are not sustainable solutions, though a transitional package for labour-intensive units is definitely warranted.