MAGAZINE

FORGET DEVALUATION, FOCUS ON POLICY
India’s merchandise exports shrank 0.3%
in August, compared to a year ago. Exports
have fallen in 20 of the last 21months. The
balance of trade looks healthy because
imports fell 14%, the 21st consecutive
month of this trend. Neither is healthy.
Exports are dented by global recession, and
by low productivity, thanks to poor
policymaking. Falling imports, especially
of non-oil, non-valuables that include
capital goods, which shrank 3% year on
year, shows the lack of appetite to invest.
Today, exporters are rooting, with some
camouflaged support within the
government, for a devaluation of the rupee,
which has appreciated 2.5% in six months.
This is a bad idea that has to be dropped.
The rupee is poised to slide against the
dollar in any case. Later this month, around
$20 billion will flow out of India as
redemptions for foreign currency nonresident
bonds. This will put pressure on
the rupee, whose exchange rate is set by
the market, the RBI only dampening
volatility. Much of our exports have
imported components, so devaluation will
actually
Import inflation, making exports
uncompetitive. By December, the US Fed
might start hiking interest rates, triggering
a dollar outflow, weakening the rupee.
Focus, instead, on the policy mess that
hobbles exports.
A variety of domestic producers - Ficci
recently produced a detailed list are
hamstrung by steep duties on imported raw
materials while duties are lower on
finished imports. A minimum import price,
between $341 and $750 per tonne of
imported steel, protects profits of local
steel manufacturers, but cripples industries
that use the metal. The government may
extend such protection to aluminium as
well. It should not. Scrap the inverted duty
structure. In fact, to extend the same rate of
effective protection to all sectors, have the
same low rate of import duty for all
products, as Chile does. Build better
infrastructure like roads and ports;
minimise paperwork that slows down trade
and open non-critical sectors to 100%
overseas investment. Regulate quality in
sectors like pharma. That is the way to
compete globally.