A weaker currency helps in the growth of exports, a theoretically correct argument, was stated by the IMF. A certain amount of truth in this statement can also be found in the precedent set by China; who has kept its currency, the renminbi, artificially low just to boost their export competitiveness. The same has been cited by a number of right economists, who claim that the depreciation in the value of the Indian currency, the rupee, against US Dollar is going to benefit the export sector of the country and such will be reflected in the GDP of India.
However, these experts have failed to mention that for such an argument to work, two caveats must hold true. The foremost caveat is that the elasticity of exports with respect to price must be high. The majority of exports from the Indian market are inelastic goods, like chemicals, agri products, handicrafts, etc. The fact is that the global growth prospects are better linked with Indian export growth. Therefore, there will be a marginal growth in certain commodities of export, but the same should not be generalized.
The second one is that the link between depreciation and exports to be really established, there has to be the scenario of the rupee weakening in a dominant manner. Thus, here not only the relation of the rupee with the dollar matters but its relation with the other currencies are also of significance. Only the East Asian economies have withstood the free fall of currencies as against the dollar, other currencies have had a far lower depreciation that the rupee like Turkey, Iran, South Africa, etc. Hence, for the above argument to work out, it is important that the rupee must fall really sharply to out-compete others, which has not happened. Thus both the caveats are not really held true. Thus the weakening of rupee in respect to the dollar will not be as beneficial to the export sector as the experts suggest.
Why has the rupee depreciated?
Not a single reason can really tell us why the rupee has depreciated so much in the recent past. There are myriad of reasons, but there are a few major ones which needs to be pointed out to broadly explain the condition prevailing today.
The first and foremost is the trade war between USA and China. Both the economies are taking serious steps to strengthen their currencies. Though China is trying to do so, USA has basically been able to do quite effectively. The tightened monetary policy of USA has caused a deficit in the supply of US Dollar, and a substantial flow of US Dollars have ensued out of other economies, so accordingly the currencies of most economies in relation to the dollar has depreciated.
Secondly, India’s domestic export does not have much attraction in the global market. And as such depreciation of Indian currency is not new to our country. Third, recently most of the countries have become protectionist in nature of late, so the prospects of Indian exports look bleak in the future. Fourth, the weak currency causes the cost of imports to rise and India’s imports have always overshadowed the exports, which further weakens the rupee. Thus the demand of Indian rupee in the global market is not rising enough to counterbalance the depreciation of the currency.
Steps taken by the Government
Recently the Government announced five measures to arrest the sharp slide of the rupee and also the deficit in the current account. These measures include relaxations in investment limits for foreign portfolio investors in the corporate debt market to attract dollars and exemption from withholding tax to companies raising funds through rupee-denominated bonds abroad. The government also indicated curbs on non-essential imports and said measures to boost exports will follow, both aimed at containing the current account deficit.
The measures seem to strengthen the rupee given these are implemented fully. Thus, how successful these measures would be, will be known in the coming few days. The market forces at the global level today, appear to be very strong, so even the complete implementation of the measures chalked out by the Government may not have the desire result and much stronger measures might be needed to counter the global market forces.
The future of the rupee is not so dark as the opposition claims and also there is no silver lining as the Government claims today. There are true signs of a tough fight ahead and the Government ought to start use Indian Rupee in the international trade as the currency of payment as it does with Iran. The dependence on US dollar as a global currency for trade should be done away with as the utility it had a decade is no where to be seen, and the current trade war between China and USA might further depreciate the rupee as the measures do not appear to be a long term solution.
The Government, therefore, shall work more towards strengthening the rupee and the dependence of rupee in the global trade should increase along with making the Indian exports lucrative in the global market.