Dealing with stagnant exports

The government and the stock market regulator have sorted out, at least for the time being, the kind of portfolio capital inflows that they want, and made clear what is not desirable. However, if this was meant to be a means to achieving the larger macro-economic objective of restricting capital inflows into the country, it is far from certain that that has been achieved. Indeed, if the registration of foreign institutional investors (FIIs) is made truly liberal, as it should be, the end result could well be more dollar inflows than before "" encouraged by the fact that Indian companies seem to be turning in yet another quarter of handsome results, with fairly good top line growth and a further improvement in profit margins. The short point is that the upward pressure on the rupee could continue.

There are both costs and benefits attached to any change in the value of a currency. Among these, the one issue that will be posed in ever starker terms will be the challenge of doing something to bolster a sagging export effort. Total exports in the first half of the year are expected to have grown by 17-18 per cent in dollar terms, which would mean about 5 per cent or less in rupee terms. Those numbers have a heavy dependence on the substantial growth in the export of petroleum products; non-oil exports may have grown by no more than 11-12 per cent in dollar terms, which would mean stagnation in rupee terms during April-September. Even this was possible only because exporters had a backlog of orders at the start of the financial year, which they could work on in the last few months. But as the rupee has climbed and the reduced receipts in local currency have squeezed profit margins, most exporters have failed to re-negotiate contracts upwards and even to renew contracts. Without a reduced backlog of orders at the start of the second half of the year, one assessment is that exports in dollar terms will show next to no growth in the October-March period. In rupee terms, therefore, exports are set for an absolute decline, and the trade deficit in goods will be in the region of 6-7 per cent of GDP.

Both the decline in absolute exports and the size of the trade deficit would be dubious records to notch up. Still, the deficit on the trade in goods should not be a concern in and of itself, because the surplus on the trade in services (mostly because of the IT sector) and remittances from overseas Indians between them will neutralise most of the deficit. The balance that will be left uncovered (less than 2 per cent of GDP) is expected to be more than paid for by capital inflows (FDI alone could be close to that number, on top of which there is all the portfolio inflow), leading to the balance of payments surplus that is the cause of the upward pressure on the rupee. While that creates a challenge for those charged with macro-economic management, the immediate question is what needs to be done to facilitate the export of goods "" which, let it be noted, accounts for about 13 per cent of GDP. The export sector also happens to employ millions of workers, mostly in the small and medium sector where there is little by way of social security. Already, there are reports of large-scale lay-offs of workers in the troubled textiles sector""a development that is almost certain to provoke protest from the Left and from political circles in the troubled regions. In the short term, the only thing that the government can do is to hand out a variety of sops, along the lines of the package announced a couple of months ago. This will add to the fiscal burden, but that would seem to be the lesser evil today.