With the rupee crossing 69 to the dollar, several experts are of the view that it can go even below 70, given how the dollar is strengthening against all currencies, as well as the condition of the country’s macro-fundamentals. Apart from the slowing in both FDI and FII inflows, as Delhi-based macroeconomist Renu Kohli points out, there has been a dramatic slowing of both India’s software earnings and remittances from Indians overseas. Software earnings grew by around 24% per year in FY02-12 and this crashed to 2.9%, while remittances growth slowed from over 16% to a mere 0.1%. Given this, the rupee’s weakness should not really come as a surprise; indeed, the NITI Aayog’s vice-chairman has said the rupee is still overvalued.
While the rupee weakening will push up inflation—high oil prices and the recent MSP increases will accentuate this—the traditional view is that this will boost India’s competitiveness and, so, exports will do well. But, once you keep in mind that most other competing currencies have also weakened, the advantage gets a bit muted. What you see on the ground, however, is that India’s exports are actually doing quite poorly despite a slight pickup in FY18. Indeed, India’s exports were around $315 billion in FY14 and they have struggled after that—they fell to $262 billion in FY16 and then recovered to $303 billion in FY18 while the rupee fell from around 62 to the dollar in 2014 to around 69 right now.
Increased exports, at the end of the day, are not just about the value of the currency, they are mostly determined by factors like quality and productivity. And, nothing shows this better than India’s performance in the textiles sector. A recent analysis by Axis Bank of India’s textiles exports to the US shows that, between 2012 and 2018 (first half), India’s share of US imports rose from 6.5% to 7.5% while those of Vietnam rose from 7% to around 12%—during this period, the Vietnamese Dong depreciated by 10% while the rupee fall around 30%. The rupee’s relative depreciation gave India’s exports a greater edge, but Vietnam’s superior quality/productivity ensured that its exports grew much faster. 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%. Indeed, last year, HSBC economists had estimated that exchange rates explained just around 20% of India’s exports growth whereas domestic bottlenecks explained half the exports performance and global growth explained the rest. And, while India’s exports do weaken a bit—with a lag—when the rupee appreciates, Axis Bank economists point out that the net impact is that the trade deficit seems to worsen with a depreciating rupee.
In other words, if the government is keen to give a push to India’s exports, it will have to do a lot more to increase productivity levels, and that requires changes in labour laws or the removal of infrastructural and other bottlenecks—electricity costs in India, for instance, are much higher than those in competing countries. And, while India has not done too well in raising productivity, recent moves like the huge jump in MSPs will hit agriculture exports as well as those—like textiles—that are based on them.