Weak rupee fails to bring cheer to exports, structural reforms needed

By: | Published: October 17, 2018 12:24 AM

A study by Axis Bank showed that, while India has moved up the value chain in the US market, the unit value of exports was similar to that of Vietnam in 2012; today, Vietnamese exports command a premium of 15-16%.

Economists at HSBC believe the rupee will fall to levels of 76 by end-2018

Economists at HSBC believe the rupee will fall to levels of 76 by end-2018 and 79 by end-2019 because the factors influencing the currency movement—a widening current account deficit and large foreign portfolio outflows—could become more unfavourable in the months ahead. While a weaker rupee should ideally have helped exporters, the fact is other competing currencies, too, have depreciated and, to that extent, the advantage is smaller. More critically, India’s exporters are hamstrung by poor infrastructure facilities that, as economists have pointed out, is more than half the problem. The past year has, in fact, been even more difficult for them with GST refunds delayed. Also, the rigid labour laws are an impediment and, unless fixed soon, will result in more unemployment. Also, while the slight fall in exports has been attributed to the base effect, it is not as though exports have been faring well otherwise; they have been faring poorly for quite some time now. Sectors such as ready-made garments and leather, which are labour-intensive, are among the worst hit.

A study by Axis Bank showed that, while India has moved up the value chain in the US market, the unit value of exports was similar to that of Vietnam in 2012; today, Vietnamese exports command a premium of 15-16%. Even sectors that were doing well—agriculture, for instance, where the the 12-month average growth is 11%—are slipping. Hopefully, the IT sector, which brings in a chunky $100 billion or thereabouts, will grow, but in recent times it has not been doing as well; all attempts have to be made to ensure this sector does not get hit. And there has to be some serious work on removing infrastructure bottlenecks to help exporters.

There is little point in consoling ourselves that the trade deficit for September was just $14 billion, smaller than the three-month average of $17.5 billion. While reining in imports is fine, the better way to ensure a surplus in the Balance of Payments (BoP), at a time when global growth is slowing, is to push exports and to attract more foreign direct investments (FDI). Portfolio flows, as is known, can be fickle—the outflow in 2018-19, so far, is a whopping $15.1 billion, of which nearly $3.6 billion has been pulled out in the first half of October alone. Economists believe the rupee’s yield advantage versus the dollar is now relatively low, both from a historical perspective as also compared with other EM currencies. That means inflows into the bond markets could remain subdued. The government must consider throwing open sectors, such as retail, to global investors if it wants to raise equity inflows.

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