A common belief while the rupee depreciates against the dollar is that it would help our exports. This ‘weak rupee shall help exports’ is shown as a positive over various negatives arising out of falling rupee. There is great attractiveness in this argument supported by textbook economics.

Undervalued or depreciated currency acts as a direct subsidy for exports while acting as a punitive tax on imports. China used the undervaluation of currency as an effective international trade tool for decades. The undervaluation doesn’t fall foul with the regional or multilateral agreements in the way export subsidies do.

However, given India’s situation, it is doubtful if we can have an effective control on the level of rupee any more given that the the central bank’s mandate is anchored to inflation control. Till recently there were calls to depreciate the rupee through direct intervention to help exports. Thankfully the idea is now put on the back-burner as the rupee has slid on its own, mostly due to the factors originating abroad.

In addition, one can never predict an appropriate level. A rupee at the level of 60 against the dollar might be very competitive for services exports, while it may still be dear at 70 for manufacturing sector. However, a mere weakening of the rupee might not be enough to boost exports, at least not in a significant way when it comes to the manufacturing sector due to three possible phenomena discussed here.

First, India is no longer an isolated market and our exports are tightly linked to imports through twin mechanisms of input import dependence and global value chains.

The inputs for two of our leading exports, petroleum and derived products and gems and jewellery, originate abroad. Crude, rough diamonds, and gold are imported to make these export products.

Globally linked

A significant part of our non-petroleum, non-jewellery based manufacturing exports are tightly linked to the global value chains. We import various steel products, automobile parts, engineering and electronic components that are processed and assembled before getting exported.

Except raw material, primary forms and agricultural exports, we have few items where the origin is fully Indian. Given this scenario, any depreciation of our currency works both ways. The gain would be only to the extent of value addition that happens in India.

Second, there appears to exist a counter-intuitive effect of weak local currency not helping exports that arises due to the choice of invoicing currency (Gopinath, 2015).

Almost all our exports are invoiced in international currencies such as dollar, euro or pounds. Assume a case where the price of a certain export good is agreed at $100 for the coming quarter.

The goods are invoiced at this price in dollars for all shipments for the quarter.

If the rupee weakens meanwhile, this invoicing method would lead to windfall profits for unhedged exporters during the period (and commensurate pain if it strengthens), but it does nothing to change the underlying competitiveness.

An item, which was invoiced at $100 earlier, remains at that level in international markets even after the weakening of rupee, unless the terms are renegotiated between the exporter and buyer for the quarter. It is seen from the study that the weak exchange rate effect may take up to two years (http://www.nber.org/papers/w21646.pdf) to trickle down into the local non-invoicing currency. This time zone while prices are renegotiated is the profit zone for Indian exporters.

The process of renegotiation and adjustments is a medium- to long-term process and therefore we don’t see an immediate terms-of-trade advantage despite a fall in the rupee value.

There is no change in the level of attractiveness of sourcing from India for an international buyer. Therefore, it doesn’t boost exports in terms of quantity or exports in dollar terms.

Only value of exports in terms of rupee shoots up to the extent of depreciation while the effect lasts.

Invoicing woes

The invoicing of international trade in foreign currency is therefore a disadvantage for us, as it doesn’t let our competitiveness improve automatically and immediately upon the depreciation of the rupee.

Unless the exporter consciously uses the windfall to mark down the prices, or uses it to boost productivity, there’s not much hope.

However, arising out of the same study, there are further two negatives possible. First, the import costs shoot up almost immediately as the invoicing is done in foreign currency which now needs more rupees to buy. This leads to inflationary pressure arising out of inelastic imports such as crude for a country like India.

Second, it adds to the cost of inputs that go into export products in the value chain, thus eroding margins. There is nothing much we can do about the way the trade invoicing is done in foreign currency.

Weak correlation

Third, there are also doubts about correlation between a weak rupee and manufacturing exports. It was found that a fall in the value of rupee didn’t lead to an expected commensurate gain in manufacturing exports during the period 2004-2012 (http://www.nipfp.org.in/media/medialibrary/2013/04/WP_2013_115.pdf). This weakness in the correlation between a weakening rupee and increase in manufacturing exports may be an outcome of combination of factors, including the integration into global value chains which makes the exports dependent on imports.

As the sensitivity to exchange movement is faster on imports, and slower on exports, the weak correlation is not a surprise. At least the Indian experience attests to it.

In short, one cannot rely on a weak rupee alone to boost exports. We need to look beyond at structural factors and take a sectoral approach to boost competitiveness if the aim is to improve export performance.

The Centre has taken various steps in this direction, significant among them being the collaboration with the State governments in order to take a micro sectoral approach at the level of clusters and districts.

While the steps produce results, we may discount the expectation of a weak rupee boosting exports.

The writer is an Indian Trade Service Officer. The views are personal

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