April 3, 2008 / 1:53 PM / 12 years ago

COLUMN - Is rupee the real culprit for India’s export slowdown?

Workers sit in front of containers at the port in Mumbai, September 6, 2007. REUTERS/Arko Datta/Files

India’s recent trade numbers look impressive. Exports during February 2008 were valued at $14.23 billion, recording a growth of 35 percent on a year-on-year basis higher than the 20.4 percent y-o-y growth registered in January 2008. In rupee terms, exports growth improved from 7 percent y-o-y in January 2008 to 21.7 percent y-o-y in February 2008.

However, looking at the cumulative figure, there is little to cheer about this data as the export target of $160 billion for the fiscal year ended March 31, 2008 looks unlikely. The cumulative exports figure as of now stands at $138.4 billion.

Apparently, the majority believe a rise in the value of the rupee is the major cause for exports not reaching the desired target of $160 billion. However, price is only a factor but not the only one. Creaky infrastructure, domestic inflation and interest rates, which are responsible for determining a country’s exports potential, are bigger bottlenecks. In fact during recent times, star performers of India’s exports basket have been items like chemicals, engineering goods (mainly, iron and steel) and the refined petroleum products – which are considered to be price inelastic or less sensitive to the movement in exchange rates.

Empirical studies conducted considering India’s historical time series trade data (starting 1950-51 until as late as 1997-98), suggest that the impact of price as a factor keeping other factors constant can explain 10 to 20 percent variation in Indian exports. However, given the recent changes in composition of Indian exports this impact of price change on exports revenue is expected to be less than 10 percent. All in all, rupee appreciation at best can be a factor but not the factor for the current slowdown.

India does not have simple rules and procedures to assist its exporters. A maze of government orders, regulations, rules and procedures have certainly played an important role in slowing down the growth rate of Indian exports by raising the cost of production. The recently published World Bank’s Doing Business Report, 2008 put India in 120th position out of a sample of 178 countries behind China, Sri Lanka, Bangladesh and even Pakistan on ease of doing business.

As for enforcing a contract, it takes an average of 1420 days in India and involves 46 different procedures. Importing goods takes 41 days and 15 documents. Tax payments have to be made 60 times a year and the process takes 271 hours.

As a percentage of GDP, India still spends one third of what China does on its infrastructure. It is little surprising to see why India’s services exports (which is less dependent on infrastructure) have always outperformed its manufactured exports (which is more dependent on infrastructure). At a time when Finance Minister Palanaippan Chidambaram has not given any incentives to exporters in Budget 2008, there is a need to think about these regulatory and procedural constraints to sustain 20 plus percent growth rate of India’s merchandise exports.

Nilanjan Banik is Associate Professor and Program Director, Development and Sustainable Finance, at the Institute for Financial Management and Research, Chennai. The views expressed in this column are his own.

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