Higher rupee both problem and oppurtunity

Last updated: 29 September 2007

A part and parcel of India’s sizzling growth story during the last five years is the sustained spurt in merchandise exports, which have grown by more than 20 per cent in dollar terms annually in this period. Yet exporters are none too happy as they are worried about the appreciating value of the Indian rupee in recent months vis-À-vis the US dollar. The exporting community is perturbed over what it calls the perfunctory measures put in place by the authorities to arrest the appreciating value of the rupee that threatens to make them uncompetitive. They say the upward revision in drawback rates notified in July was inadequate to compensate them against appreciation even as the procedure prescribed for claiming supplementary rate is both cumbersome and irksome, adding to their transaction cost a tad or so. The Duty Entitlement Passbook Scheme (DEPB) rates have been increased by only 2-3 per cent as against 5 per cent announced earlier and the two percentage decrease in pre and post shipment credit rate by the RBI has brought the export credit in the range of 7.5-8 per cent, which is still well above the 6 per cent rate proposed by the Commerce and Industry Ministry, so complain exporters. India seldom went for export-led growth as it was inured to a prolonged spell of import substitution in the planned era of development in much of the earlier decades. Yet, the push for exports, especially from the 1980s when the Abid Hussain Committee made sweeping recommendations for trade policy reforms that were subsequently given concrete shape by the Narashima Rao Government in its broad-based industrial and trade policy reforms in 1991, warranted promotional measures. This was so, given the relative infrastructural infirmities Indian export is faced with. Fiscal fillips, such as lower duties on capital goods imports or lower duties on other inputs, could improve the margins for exporters when the rupee appreciates. India’s quest for garnering higher FDI remained relatively patchy for almost eight years since 1999. However, with good economic growth and consistently salutary export performance for five successive years, talk of attracting $25 billion by way of FDI and achieving an export target of $160 billion in the inaugural year of the Eleventh Plan is in the air. In order to ascertain how realistic India’s hope is on both counts, Business Line caught up with the Union Commerce and Industry Minister, Mr Kamal Nath, in his Udyog Bhawan office. Always restless and checking his mobile phone frequently but never losing track of the queries posed to him, Mr Nath seems determined to help shape India’s trade and investment policy by consolidating the bits and pieces carefully crafted over the years by his predecessors.

Excerpts from the interview:

On slowdown in exports in the aftermath of appreciating rupee: The July export figure was lower when we talk of a much higher base. If we were to look at the export increase from two years ago, you will find that there is a substantial jump. Export growth was 30.8 per cent in 2004-05, 23.4 per cent in 2005-06. In 2006-07, it was 20.9 per cent. In the light of rupee appreciation, exporters have been affected and we are working on the measures the government should take and also urging exporters to use this as an opportunity for greater efficiency and cost consciousness. So it is both a problem and an opportunity for exporters. I am not revising the target for this fiscal. A decision was taken by the Prime Minister to give service tax exemption for exporters through a refund mechanism and there will be remission in service taxes for exporters. No taxes are exported because if any tax is on export, it amounts to an export tax. This is being worked and it is not a decision by the Commerce or Finance Ministry but by the Prime Minister. This has to be implemented and the Prime Minister will intervene if there is a delay in notification. Many areas are focussed for export increase and the export basket, including agricultural sector, engineering and textiles. Exporters must learn market dynamics and even the currency concern is something that they have to build into their export strategies and Government will help in ensuring that as much of a level playing field as possible is provided. Export finance has to have a differential rate compared to other activities. In the end, export is driving the GDP growth. The RBI is not immune to this. The RBI’s objectives and the Ministry’s objectives are not different. The RBI has not really understood what special economic zones (SEZs) are and the central bank refuses to understand how SEZs are the engine of growth. SEZs are industrial clusters and infrastructure created in them is meant for exports.

On slowdown in industrial production: No doubt the industrial production logged a double-digit growth of 11 per cent in the first quarter of the current fiscal with the manufacturing sector at 80 per cent weightage in the index showing a double-digit growth of 11.9 per cent. I am disappointed by the July figure, it is monsoon season and we do have problems in July. Let us see. I am still hopeful that this would be made up. The July slowdown is not a pattern.

On FDI: The Government is looking at certain options and a revamped foreign direct investment (FDI) strategy would be in place in the month of October. It will not be a new FDI policy but one that would streamline existing procedures for better clarity and ease of operation. First-quarter FDI inflows have been $4.9 billion as against $1.7 billion in April-June 2006, registering a growth of more than 185 per cent. In the first six months of calendar year 2007 (January-June), FDI inflows saw $11.4 billion, as against $3.6 billion during the corresponding months of 2006. Services, telecom, electrical equipment, real-estate and transportation are the five major areas receiving FDI inflows in 2007-08. The aggregate inflows from the top five investing countries during the first two months of the fiscal year are $2.9 billion, with major investment of $1.9 billion during 2007-08 coming from Mauritius, followed by Japan, Cyprus, the US and Singapore.

On WTO issues: Talks are going on in Geneva at the official level. This Round is about structural flaws being corrected. A serious deficit of political sagacity and courage on the part of the developed world was responsible for the tardy progress in talks. The protectionist concerns of corporate agriculture in the developed world rest on two instruments: subsidies and border protection through high tariffs, TRQs (tariff rate quota), tariff escalation, non-ad valorem duties. The real issue will be their phasing these out by how much and how fast. Appropriate improvements in the offers of the concerned developed countries in domestic support (US) and agricultural market access (EU) remain crucial to a successful conclusion

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Higher rupee both problem and oppurtunity

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