Weak export pulse is Achilles' heel of the current account

In the past week or two, a joke doing the rounds is that the rupee has became a senior citizen. Well, it almost did, but was pulled back from geriatric status courtesy efforts of the Reserve Bank of India.

 The government too tried its best to calm down the markets by promising to accelerate reforms, but every macroeconomic indicator has been suggesting that in India, policies and reforms have not moved much to make an impact even on sectors which could benefit from a fall of the rupee, especially, the exports segment.

A close look at the macroeconomic picture suggests a gaping hole in the country’s current account deficit (CAD); this, in layman’s terms, means that the country is importing more than it is exporting and thus there is a need for more dollars. The dollars are either drawn from the country’s own capital reserves or from overseas money, which in turn comes in the shape of foreign direct investments or foreign institutional investments (foreign investments in India’s stocks and bonds) or the external commercial borrowings.

But, if foreign money is not coming in and the country’s capital account is also in deficit, the fallout is on the currency — it starts to weaken. When the currency depreciates, exports get competitive and more money starts pouring into the economy of the depreciated currency. Contrarily, imports become more expensive and there is a stress on the current account. This is the time when companies start to clamp down on imports and move on to boosting their exports.

However, in the Indian context, neither method has worked. Since India is a net importer of petroleum, it cannot move further on this front. The second largest imported commodity in the country is gold. Since Indians have much affection for gold and falling international prices are supporting further gold buying, the country cannot make much progress on this front either. 

Though government and RBI have put in place curbs to stem imports of gold since the beginning of this year, the net impact of these measures has been minimal. In fact, during April and May, gold imports have been higher than at any time in history. In April, gold imports were 139 tonnes which zoomed to a mammoth 162 tonnes in May. The appetite for gold in India is such that doubling customs duty from 4 per cent to 8 per cent, in a span of just four months since January this year could not check the inbound shipments of gold. 

The Finance Minister has now made an impassioned appeal to people to stop buying the yellow metal, which only shines a little more than copper or brass, but has grave economic consequences. But, bullion experts note that the craving for gold in India will remain till the time the inflationary expectations of the public are not assuaged. 

Hindrances aplenty

On the export front, where the country could have cashed in on the weakening rupee, other hindrances exist in the form of poor infrastructure, lagging labour and land reforms, flow of capital and relative inflation rates.

 A survey by Industry Chamber PHDCCI suggests that India’s exports have declined significantly in depreciating rupee scenarios, which is evident from the recent trend when the rupee depreciated from around 48 to a dollar in 2011-12 to around 54 in 2012-13, and exports growth fell sharply from around 22 per cent to roughly (-)2 per cent respectively. 

And, it has been found that India’s exports grew robustly in rupee appreciation years while they declined during rupee depreciation years. 

In the span of a decade, the rupee has depreciated significantly against the dollar, whereas during 2008-09 as compared to 2007-08, the exports growth decelerated sharply from around 29 per cent to 14 per cent. Subsequently, in the post-Lehman crisis period of 2009-10, when the rupee depreciated further, exports growth slipped to as low as (-) 3.5 per cent. 

When the rupee depreciated from around 46 to a dollar in 2010-11 to about 48 to a dollar in 2011-12, exports growth slowed down considerably from around 41 per cent to about 22 per cent.

A similar trend was observed in the trade deficit too. The trade deficit has been increasing over the last decade from around $6 billion in 2000-01 to around $192 billion in 2012-13. The widening of trade deficits was found to be dependant on overall global demand and not the exchange rate of rupee. For example, when the rupee appreciated during 2006-07, the trade deficit was at a moderate level of around $59 billion.

 However, when the rupee met with significant depreciation during the Lehman crisis year of 2008-09, the trade deficit entered into the higher trajectory of around $118 billion. Experts opine that the fundamental weakness of the economy needs to be corrected soon and policy responses need to be quickened for permanent results.