Impact of Depreciating Value of Rupee on India’s Trading Policies

by September 1, 2018 0 comments

Impact of Depreciating Value of Rupee on India’s Trading PoliciesAs the vale of Indian rupees is depreciating with an increasing rate, policy-makers require to thoroughly analyze the performance of the currency, export earnings and import payments.

The value of rupee against US dollar has depreciated to an all-time low of Rs 70, the causes for which have been attributed to external factors, which are, of course, not under our control. The Indian economy must, however, not look too far to sail through testing times. The solution lies in history. Empirical research may provide the best direction to use international trade as the path for rapid development in taking advantage of the depreciation.

Globalisation has rapidly transferred from one sector to the other, and is now growing its pace to the financial sector. This certainly benefits India in terms of growth of investment bonds and equity investments. But chances are ripe that it may also backfire in the form of transmitting poor performance of other currencies to India, as it happened in a case where the Turkish Lira adversely affected the Indian rupee via non-deliverable forwards.

It is, therefore, essential to study the real reasons for the continuous depreciation of the Indian rupee as also find out ways to cure the economy. A wise approach would be to roll out precautionary economic policies to protect the Indian currency and use the depreciation to the hilt. Answer also lies in a through analysis of the performance of the Indian currency, export earnings and import payments of the country.

As per World Bank data, with the depreciation of the Indian currency by 55.81 per cent (2007-2018), export earnings of India increased by 70.1 per cent and import payments increased by 61.42 per cent. This signifies that India’s export earnings increased faster than import payments. Even then, India is still grappling with trade deficit. This because India has a huge backlog of trade deficit to clear.  With the growth of import payments catching up to the growth of export earnings, trade deficit in July 2018 reached five-year high, despite vigorous growth in export.

The solution lies in a long-term plan and in taking advantage of the depreciation. Policy-makers need to focus on four broad aspects. First, India’s elastic export market should be destined to the developed countries, where Indian currency is performing poorly (depreciating) as compared to the destined country’s currency. This will enhance India’s export earnings as and when the Indian currency depreciates — exports will increase at a speedy rate as export commodities are elastic.

Second, India’s inelastic export market should be destined to countries where the Indian currency is performing stronger (appreciating) than the trading partner. This will be beneficial for the Indian economy when an increase in export earnings of our country from elastic exports is more than reduction in export earnings of inelastic exports.

Third, India’s elastic imports must originate from countries where the country’s currency is depreciating with respect to the trading partner. This will ensure that as imports become costlier, demand for import reduces.

Fourth, inelastic imports of India should be originated from countries where the Indian currency is the stronger relative (appreciating) to the import-originating country. This will ensure that when the Indian currency is depreciating, demand for goods will not increase, as they are inelastic. However, this will be fruitful if reduction in payment of elastic imports of India is more than the growth of import payments of inelastic imports.

Thus, India needs to carefully look at the international trade matrix of exports and import commodity basket and strategically identify the elastic and inelastic exports and imports. At the same time it must analyse the performance of the Indian currency with respect to its export destination and import origin and then allocate efficiently in the international trade. Although it’s easier said than done, only sound international trade policies are the linchpin for a strong and stable India.

(The writer is Assistant Professor, Delhi University, and a PhD scholar of Economics)

Writer: Tripti Sangwan

Courtesy: The Pioneer

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