Tokyo: Indian exports have risen by double digits for the second straight month, suggesting that a turnaround has begun—it rose by 27.6% in March. A revival of the global economy has only renewed these expectations. Union minister of state (independent charge) for commerce and industry Nirmala Sitharaman dwelled on this trend in a conversation with Indian media on the sidelines of the India Investment Seminar co-hosted by Japan External Trade Organisation and the Confederation of Indian Industry in Tokyo on Friday.
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During the conversation, Sitharaman signalled a fundamental rethink in the government’s view on the exchange rate as the sole tool for incentivizing exports. Instead, she said, the effort should be to focus on other constraints such as infrastructure to improve competitiveness. Edited excerpts:
What are your initial thoughts on the export trends?
Bottoming out had ended and was hoping it would be steady growth upwards. Was not trying to prophesy, but based on what industry was telling us that they are now able to make up for some lost ground; newer markets are catching up. Also I suppose some of the Indian companies had very smartly entered the value chain in certain sectors whose benefit is now being reaped.
For example...
Largely automobiles and electrical components. Also, I suppose you can’t miss out the steady growth which has continued unabated in services. So overall, India is reaping the benefits of domestic reforms, the approach of the government towards easing of a lot of difficulties which existed; many more are in the pipeline. I am sure goods and services tax (GST) will have a very positive effect on exports at various levels and this too will have a bearing on the (future) performance.
But isn’t the rupee’s appreciation worrying?
This is a question which has logically been raised constantly and expectations remain that you have to answer it either way and so on. But I think, what is important is for us to understand that the economy gets reflected through your currency. Yes, when the rupee is high exports tend to suffer is a feeling that has been well established in economic parlance.
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But I think we are talking of an economy which in the last few years has depended not just on its exports but we have a blend of exports and domestic industry; unlike China, we have not really put our focus only on exports and export-driven growth. Although I will never underplay the importance of exports in our growth; it can be better is what I would say and in that context therefore if I go with that school of thought I would then have to say yes, the rupee getting stronger is a worry, if I am talking only from the point of view of export performance.
But, I think the overall strength of the economy is now getting very adequately reflected, unlike the time when it was purely driven by exchange rates alone; in the sense that the rupee versus the currency you are talking about. So today I would think yes the exporters will have to factor this in. The last few years you have seen too many fluctuations in currency and therefore the exporters have been constantly making room for that fluctuation as it were in their calculation. But today you are looking at that volatility continuing, the Indian rupee strengthening; therefore the exporters, I would think, given that the volatility in the last two years and today’s strengthening of the rupee will not be lost.
Although strengthening of the rupee by itself will be worrying today I will contextualize it in the Indian economy’s overall strengthening position.
But the rupee has appreciated against other currencies too so how do we see this perceived lack of competitiveness of Indian exports?
I would think it is important for us and I am sure the exporters would be fairly clear in their head about it; currency based lack of competitiveness is far lesser in the context of rupee strengthening for the Indian exporter even though I grant it that the strengthening of the Indian rupee of late is not against just one currency.
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But for an exporter while that will be worrying because his margin of profit will come down, overall competitiveness of the Indian exporter compared to many other exporters of similar commodities remains favourable; and therefore this fluctuation per se or this strengthening of the Indian rupee per se should not eat into his margin—because our labour is still cheaper; if for the same commodity you were to compare with a competing economy like China I would still think that because of the arbitrage that the manufacturer gets out of a comparatively cheaper labour makes up for the fluctuation you had in currencies.
But if you look at the interest rates and the logistics cost…
You have to put more weight on lack of logistics. Inadequate infrastructure or overpriced infrastructure, like electricity, these are the kinds (of constraints) I would take to be unfair to a manufacturer. These are the kind of things I would take as arguments where his competitiveness gets affected, rather than take the currency’s fluctuation or currency’s strengthening as affecting his competitiveness. His core competencies are hit badly because of our lack of logistics, our freight costs, our energy costs, the reserves that he is expected to maintain or the uncertainties that he has to factor for absence of 24x7 electricity, absence of raw materials on time, imported raw materials and their cost. These are the things I would factor in determining if my exporter is cost competitive, rather than the fluctuation of the currency.
Is there then a fundamental rethink, because traditionally, we have used exchange rate as the incentive.
Yes, that’s right. That is something that the government has been looking into. That is one of the reasons why sometimes it may appear as though we don’t put so much emphasis on exchange rate anxieties. We may have to look at it in larger macro-economic perspective but the attention of policy planners, the state governments should go towards (improving) logistics, (trade) facilitation.
Japan and China used their currency while they fixed the infrastructure and other elements.
That’s true but when you are looking at an economy (like India) which has so many dimensions, exports is one of the things you have to deal with. Your large market itself demands that commodities reach all over the country and at fair rates. (At present) a produce made in North (India) reaching South is more expensive than what we import. So do you give less importance to non-importable goods? You can’t. I am glad that the government is not underplaying the importance of logistics and infrastructure, even for domestic trade; I am glad GST is happening.