(Live Mint)-Great fall of India’s exports • The news about exports was dismal throughout 2015. For 12 consecutive months, from January to December, India’s total exports, in terms of US dollars, were significantly lower than in the corresponding months of the preceding year. This was, perhaps, a nadir. • Consequently, the trade deficit reached alarming levels, at 10% of gross domestic product (GDP), in 2011-12 and 2012-13. Even in the remaining three years, its average level, at 7% of GDP, was among the highest for countries in the developing world. • The associated current account deficit would have been simply unmanageable, were it not for software exports at more than $70 billion per annum, and remittances in the range of $70 billion per annum, in the past three years. • In addition, world prices of crude oil dropped from around $110 per barrel in end-June 2014 to less than $50 per barrel in end-January 2015, to remain in the range of $50 per barrel through the year. But, in mid-January 2016, the price plunged below $30 per barrel, its lowest since 2004. This windfall gain has eased what could have been an exceedingly difficult situation. • It must be recognized that the global economic situation has been difficult for some time. The financial crisis that surfaced in the US in late 2008 led to a sharp contraction in world trade that was much greater than the fall in global output. The Great Recession, which followed in its aftermath, persists even now. Recovery in output is slow, uneven and fragile. The recovery in trade is just as slow. • During 2010-14, India’s export performance conformed to the average. Its share in world exports stayed in the range of 1.5%, while its share in developing countries’ exports remained unchanged at 4%. Yet, over the same period, some Asian economies, such as China and Vietnam, managed to increase their share in world exports. • India probably fared worse than the average in 2015. More importantly, its performance in exports of manufactured goods was clearly below par throughout, as its share in world manufactured exports (1.3%) was significantly less than its share in world manufacturing value-added (2.3%). • The slow growth in world trade does impose a demand constraint on total exports from developing countries. But this demand constraint is not binding for single countries such as India, particularly if their share in world exports is small. After all, in the same world economy, several Asian countries boosted their export performance by increasing their share in global exports. • Even if it is a convenient alibi, it would be misleading—if not deluding ourselves—to blame the world economy for India’s dismal export performance. The explanation lies in domestic economic factors. And the main culprit is the exchange rate of the rupee. • The exchange rate is a crucial price that determines the rupees earned per dollar of exports (and rupees paid per dollar of imports). Thus, it shapes the price competitiveness of exports in world markets and the profitability of exports for domestic firms. It also influences the relative profitability of exports, compared with sales in the domestic market, which is particularly important in India because most exports are exportables that can be sold either in the world market or in the home market. • There are two derived concepts that are important. The nominal effective exchange rate (NEER) is an index that measures the value of a currency against a weighted average of a basket of currencies. The real effective exchange rate (REER) adjusts NEER for differences in the rates of inflation at home and abroad. NEER and REER can be either export-based (with appropriate weights for currencies of countries that are major markets for, or competitors in, its exports) or trade-based (with appropriate weights for currencies of its important trading partners). • It shows that the NEER index appreciated by 8% (from 70 to 75.6 compared with 100 in 2004-05). In contrast, the REER index appreciated by 14% (from 101.2 to 115.2 compared with 100 in 2004-05). Obviously, the competitiveness of exports over the past two years was diminished significantly by the exchange rate of the rupee. • There are, of course, other underlying domestic factors that constrain export performance. Despite massive import liberalization, access to imported inputs necessary for export production remains a serious problem. The infrastructure—power, roads, transport, communication and ports—is simply inadequate. Non-price factors that affect the competitiveness of manufactured exports, such as quality or delivery dates, persist. But these usual suspects have been with us for a long time and cannot, by themselves, explain the dismal export performance in recent years. • It is essential to recognize that the exchange rate is a price which matters for the economy in many spheres much more important than portfolio investment inflows that can be unstable, fickle or volatile. The overvaluation of the rupee, which makes exports difficult and imports attractive, must be corrected. • The time has come to let the rupee depreciate not just in nominal terms but also in real terms. A more appropriate exchange rate would help reduce the balance of trade deficit to manageable proportions by stimulating exports and dampening imports. It would also help domestic manufacturing firms competing with imports to Make in India and combat the onset of de-industrialization. • Even for those who want the comfort of large foreign exchange reserves, exports and trade surpluses (China and Taiwan) are a far better way of accumulating reserves than portfolio investment inflows (India) that can be withdrawn on demand. • Clearly, the exchange rate is a critical determinant of export performance and matters for the economy in other domains. Similarly, exports play a vital role in the performance of the economy. In the external sector, exports are a means of financing imports, which are essential to sustain desired levels of consumption, investment and production in the economy, while keeping the trade deficit and external borrowing within manageable proportions. • At the macro level, exports not only provide an external market that complements domestic demand as a driver of economic growth on the demand side, but also impart efficiency and competitiveness in domestic production by enforcing a cost discipline on the supply side. India cannot aspire to sustainable high growth without a dramatic transformation in its export performance.

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