Drop in India's rupee since the start of the latest quarter:
-13.7%
It’s standard macro-economics: When a country’s currency
declines, its exporters should soon get a boost as the lower currency makes
their goods more competitive. By that rule, India should be enjoying an export
boom. Since the start of May, the currency has dropped 23 percent, making it
one of the world’s worst performers. Sure enough, exports did go up in July,
rising 11.6 percent year-on-year, the best increase in more than 12 months.
Consumers worldwide shouldn’t expect to see a surge in
Made-in-India products in the coming months, however. The July increase comes
after a period of weakness: India’s exports dropped 1.8 percent in the 2012-13
fiscal year. And while the currency has been steadily weakening for two years,
the decline of the rupee hasn’t helped narrow India’s current-account deficit.
Instead, the trade gap has just gotten bigger, hitting 9 percent of gross
domestic product in the first quarter. “The sustained and large depreciation of
the [rupee] since mid-2011 does not appear to have had any near-term impact on
the current-account deficit,” Mumbai-based Goldman Sachs economist Tushar
Poddar wrote in a report published on Aug. 26. Chances of a short-term rebound
driven by a weaker currency are “doubtful,” he added.
One culprit is rising prices inside India, with the consumer
price index jumping 9.6 percent in July. India’s high inflation undercuts the
competitiveness gains from depreciation, says Indranil Pan, chief economist at
Kotak Mahindra Bank in Mumbai. “Exports are unlikely to get any significant
boost,” he says. “Any benefit [from the weak rupee] will be offset by the fact
that there is a huge inflation problem in India, and the cost of manufacturing
is very high for local companies.” Rising costs of raw materials are making
business challenging for Rajesh Mehta, chairman of Rajesh Exports, a
Bangalore-based producer of gold and diamond jewelry. “There is no big benefit
for exporters,” he says. “A stronger and a stable currency is always better for
businesses.”
For Indian exports to boom, local exporters need trading
partners with healthy economies. There aren’t many of those around, making an
export-led recovery difficult, according to Raghuram Rajan, the chief economic
adviser who in September will take over as the country’s central bank governor.
“The whole world is in a slow-growth phase, and it is going to be hard to
increase market share in this environment,” Rajan told Bloomberg
Businessweek in a March interview. “It is harder than in normal
times.”
India’s structural problems also make it harder for local
exporters to cash in on the weak rupee. Although information technology
outsourcers such as Tata Consultancy Services (TCS:IN) and Infosys (INFY) have
grown, thanks to low-cost workers in Bangalore and other Indian cities, the
country’s manufacturers have suffered from India’s sorry history of
underinvesting in ports, roads and other infrastructure. The “infrastructure
deficit,” says Moody’s Investors Services sovereign analyst Atsi Sheth, “lowers
growth potential and discourages foreign direct investment.” That’s one reason
India, unlike China and other Asian neighbors, is not a big exporter of
computers, consumer electronics, toys, or sporting goods.
There are grounds for optimism. The government is aware of
the structural problems and wants to make large investments to improve
infrastructure in a manufacturing “industrial corridor” between Delhi and
Mumbai. Higher costs in China, meanwhile, are leading some labor-intensive
manufacturers to look for alternatives in Asia, creating “a huge opportunity
for India,” says Said S. Gopalakrishnan, president of the Confederation of
Indian Industry. To take advantage of the opening, he says, India needs to
revise rules that make it difficult for large employers to hire and fire
workers. “Labor regulations must be placed back on the table for mass
manufacturing,” he says.
With national elections due next year, though, such
politically charged reforms are unlikely. Instead, Prime Minister Manmohan
Singh and the ruling Congress Party are focusing on ways to win over voters in
the countryside. The government won a victory on Aug. 26 with the lower house
of Parliament approving a plan to provide subsidized grain to two-thirds of
India’s 1.2 billion people. That might help Congress stay in power next year,
but it also increases concerns that the government is backtracking on promises
to cut the budget deficit. Over the past five months, there have been “clear
signs of a reversal” in India’s austerity program, DBS warned in an Aug. 27
note, with second-quarter expenditures up more than 28 percent year on year,
compared to a budgeted 16.4 percent increase.
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