Though it is not clear whether the government, or sections of it, continue to believe a strong rupee is good for the economy since they make imports cheaper, a combination of the currency and ongoing disruptions due to demonetisation and GST continue to hurt the economy. While India’s exports grew by 11.2%, imports surged in April-November 2017, showing a growth of 22.4%—in FY17, in contrast, imports were almost flat and grew by just 0.9%. Certainly, hardening crude oil prices resulted in imports growing at a faster rate than in FY17—for two years before that, oil imports contracted in value terms. While oil imports rose by $11.7 billion in April-November, overall imports grew by $54.5 billion. Take out both gold and oil, and it turns out that, for the April-November period, FY18 imports grew by a whopping 29.8%; in contrast, for all of FY17, non-oil non-gold imports rose a mere 1.4%.
Since consumer demand hasn’t surged in the first eight months of FY18, it is logical to assume that increased imports have largely replaced domestic supplies, either because local supply chains continue to be hit and/or because, with the rupee continuing to strengthen, imports have become 5-6% cheaper; in FY17, by contrast, the rupee was more stable—the rupee was 66.2 to the dollar on January 3, 2016, 68.14 on January 2, 2017 and 63.69 on January 1, 2018. With the current account deficit now looking worrying and most estimates putting it at over 2% of GDP for FY18, this has to be an immediate cause of concern for the government. This is where issues like India’s high interest rates come in since they make India more attractive for foreign debt money.
The same supply-chain issues, along with the rupee, are clearly affecting India’s exports as well. While India’s exports grew 9.5% in April to October 2017, as Crisil points out, Vietnam’s exports rose 23.8%, South Korea’s 18.5%, Indonesia’s 17.8% in the same period… at 7.4%, China’s exports grew slower than India’s but the base is so dramatically higher. Among the exports, farm exports grew 14.8%—within this, basmati rice grew 18.9% and non-basmati 47.3%—and marine products 29.5% while traditional areas like leather products grew just 0.9%, gems and jewellery contracted 3.8% and textile and apparel grew just 3.85%; petroleum products grew 17.6% and contributed to around 18% of total exports growth. The government has tried to come up with more attractive exports incentives as well as schemes to ensure GST credits are not delayed—exporters will no longer have to pay GST and then wait for refunds. While this may help exports grow faster now, it is difficult to see how exports can grow dramatically until the domestic industry is more competitive.
As Crisil points out, in the decade between 2006 and 2016, the ‘revealed competitive advantage’ of India’s traditional exports has been falling steadily—the RCA of gems and jewelry fell from 6.38 in 2006 to 3.96 in 2016, from 3.12 to 1.97 for leather and from 2.43 to 2.22 for readymade garments. In the apparel sector, India’s tiny manufacturing units—2 million establishments, on average, employ 1.5 persons while another 2,800 hire 118 workers each—simply cannot compete with countries like Bangladesh and Vietnam on either quality or prices since they have much larger units; apart from the older SME reservations policy, this is a direct result of India’s labour laws that make it difficult to run larger units. Unless this is addressed quickly, India is not going to be able to really cash in on the global exports boom.