The underlying value of the rupee, measured on a real effective exchange rate (REER) basis, is not reflecting the efficiencies accruing out of productivity gains, said Sanjeev Sanyal, senior regional economist, Deutsche Bank.
In fact, if this factor is incorporated, the Indian unit should be ruling firmer than the current level. In REER terms, the rupee is currently undervalued by around four per cent.
"REER does not give the full picture of the valuation of a currency. The Balassa-Samuelson model, which factors in such efficiency gains, is a better measure of the exchange rate parity," Sanyal said.
He felt that the rupee could touch 49.60 to a dollar in a year's time. Systematic bias towards exchange rate can either allow REER to appreciate or allow the inflation rate to increase.
According to Sanyal, the non-oil imports in the last three-four years have been petering off. One of the major reasons is because of an improvement in the productivity of the tradable sectors. The Indian industry has restructured and improved its productivity, quality, design etc.
Though this is visually obvious, there is no macro-economic data supporting this issue. According to him, one of the most obvious visuals is the upgradation of the tea stalls to coffee chains in cities.
The manufacturing sector is in a phase of consolidation. According to Sanyal, companies that are not able to last the competition should be allowed to die. This is where the new foreclosure banking laws will help the country. According to him, this is one of the most significant legislations in the recent years.
"This bit of economy which cannot compete should allowed to die. The financial system can then provide these resources which are freed up for companies that remain in the system. The framework of agglomeration can be followed and also ease out the small scale industries so that economies of scale can be exploited. There will be imports but companies which survive will become globally competitive and they will start exporting," said Sanyal.
He added that in the past decade India has been doing small bits of reforms continuously, which in a cumulative sense, has been large.
On comparison with Chinese markets, Sanyal said China has been effective in building up infrastructure. It also has been able to get the benefits of agglomeration.
"One of the major advantages for China is that it has crossed the minimum threshold level in production which India hasn't," said Sanyal.
