Why the rupee's depreciation cannot help boost India's exports by itself

For one, part of the gains stemming from the rupee's recent decline are offset by similar declines in currencies of other exporting countries

Since the beginning of this year, the Indian rupee has fallen by around 9 per cent against the dollar. Some have argued that this decline in the currency’s value will help improve India’s export competitiveness, thereby boosting its flagging exports.

But is this really the case? Will a weaker currency alone help push India’s exports?

Part of the gains stemming from the rupee’s recent decline are offset by similar declines in currencies of other exporting countries. 

For instance, since the beginning of this year, the Chinese yuan has fallen by 5.2 per cent against the dollar. The Brazilian real is down 19.8 per cent, while the Indonesian rupiah and the Philippine peso have fallen by more than 7 per cent, offsetting to some extent the gains from the rupee’s decline. Similarly, the currencies of Bangladesh and Vietnam which compete directly with some Indian exports have declined by 1.6 and 2.5 per cent, respectively. 

There is also the issue of rising costs of raw materials. The decline in the rupee’s value makes imports of intermediate products costlier. This drives up the costs of final goods, making them less competitive in global markets and thereby offsetting some of the gains from the currency’s depreciation. 

And then there also are some other factors that influence India’s exports. 

An earlier study by HSBC had shown that the currency explained only 20 per cent of the slowdown in India’s exports since 2013. Weak world growth explained roughly a third, while domestic bottlenecks were responsible for roughly 50 per cent of the slowdown in India’s exports. 

On similar lines, D K Joshi, chief economist of CRISIL, had earlier pointed out that India’s exports over the past two-odd decades had grown faster during episodes of the rupee’s strengthening. “World demand turns out to be a dominant variable impacting exports and not the rupee,” he had noted. 

Recent data from the International Monetary Fund (IMF) suggest that the global economy is expected to maintain its growth momentum in the coming years. The IMF pegs world GDP growth at 3.9 per cent in 2018 and 2019, up from 3.7 per cent in 2017.

But this rise in world growth may not necessarily mean greater trade growth. Perhaps due to the ongoing trade war, the IMF has lowered its projection for global trade to 4.8 per cent in 2018 and further to 4.5 per cent in 2019, down from 5.1 per cent in 2017. 

A similar decline in trade growth is projected for emerging market and developing economies. Trade growth for this group is expected to decline to 5.7 per cent in 2018 and further to 5.4 per cent in 2019, down from 6.7 per cent in 2017.

These numbers suggest that India’s exports may not get a fillip from greater global trade as in previous years. So far this year, India’s exports have averaged 10 per cent growth, lower than China (14.1 per cent), Indonesia (11.4 per cent) and Vietnam (15.8 per cent). 

Part of the sluggishness in exports, as the HSBC analysis points out, can also be traced to domestic issues. 

With tax refunds being blocked for months, the shift to the goods and service tax (GST) regime has left many exporters starved of working capital. For micro small and medium enterprises (MSMEs), which account for the lion’s share of India’s exports, the situation was even worse. 

A recent study by analysts at the Reserve Bank of India (RBI) shows “MSME exports were affected more adversely by issues related to GST implementation than demonetisation due to a delay in the refund of upfront GST and input tax credit affecting cash-driven working capital requirements.”

The study further added, “a sharp rise in imports along with a fall in production of these sectors supports the evidence of supply chain disruptions due to GST implementation rather than the weak demand conditions per se.” 

Then there is the issue of regulatory hurdles. 

While India has made remarkable strides in improving its ranking on the ease of doing business, it continues to fare poorly when compared with other Asian counterparts on many parameters. 

For example, it takes 106.1 hours in India for exporters to deal with customs regulations, and with regulations relating to other inspections that are mandatory, in order for the shipment to cross the economy’s border and also the time and cost for handling that takes place at its port or border. By comparison, in China, it takes 25.9 hours, while in Indonesia and Bangladesh it takes 53.3 and 99.7 hours, respectively. Similarly, on documentary compliance, too, India fares poorly. 

Even the costs involved in dealing with these regulations are higher in India. It takes an average $382 in India to deal with such regulations. By comparison, in Indonesia, it takes $253 to deal with such formalities, while in Vietnam and Thailand it takes $290 and $223, respectively.