Only a cheaper rupee can spur Indian growth


https://www.ft.com/content/c3a28628-5b92-4db7-a8c2-0f41bea05969

Elite interest favours a strong currency, to the detriment of the nation
ASHOKA MODY


While other Asian policymakers, such as those in South Korea and China, have strategically used sizeable depreciations of their currencies to bolster export competitiveness, Indian elites bemoan every infinitesimal decline in the rupee’s value as a national humiliation. A unique economic and political confluence first entrenched this bogus pride in the country’s psyche in the mid-1960s. And since the 1990s, the country’s corporate leaders and new rich have wanted to maintain a strong rupee. As a result, the country’s export-based growth has suffered, as have jobs for low-skilled workers.


India is triply handicapped in exporting manufactured goods: it has a poorly educated workforce, few women in its factories and an overvalued currency. Education and female labour force participation are key to raising productivity, but take years to achieve. Today, only a much cheaper currency — about 100 rupees per dollar rather than the current 82 — can spur Indian exports. It is low-hanging fruit.

In a rare sane moment in 1949, a newly independent India devalued the rupee from Rs3.3 to Rs4.8 per dollar, bringing relief to its uncompetitive economy. Indian manufacturers could earn profits even when they lowered dollar sale prices, which helped increase exports. Costlier imports slowed import growth, helping reduce the current-account deficit. But the task was never completed. With low productivity and high inflation, India could not match countries such as Japan in labour-intensive manufactured exports. The World Bank and the IMF financed India’s large current account deficit, creating the illusion that it did not need currency devaluation.

When those two institutions finally threatened to stop financing that deficit, the country’s officials foolishly negotiated the rate to Rs7.5 per dollar in June 1966. This too-little-too-late devaluation did not compensate for the rise in domestic production costs. Taiwan and South Korea raced ahead, helped by currency devaluations; Indian exports languished.

The perceived failure of the 1966 devaluation to spur exports forever tarnished Indian belief in an activist exchange rate policy. Rather than encouraging more aggressive nominal devaluation to offset the rise in production costs and thus achieve real depreciation, devaluation “by stealth” was always too little, too late. In the 1980s, China used aggressive exchange rate depreciation as key to its monumental export push.



India’s 1991 financial crisis was another all too brief moment of sanity. Authorities devalued the rupee in July 1991 and let it float in March 1993. But new forces strengthened the currency. Software exports and remittances from workers in the Middle East had a bolstering effect. More importantly, once global money managers began funding large Indian companies, a strong rupee helped that small elite minimise the costs of repaying international creditors and investors. A strong rupee also helped aspirants to elite status shop for fast cars and handbags, often in Milan and Singapore.



Reflecting the national sense of pride and elite preference, political gamesmanship conditioned policymakers to focus on stemming the currency’s decline. In 2013, prime ministerial candidate Narendra Modi bemoaned the fall in the currency, saying: “Our rupee has been admitted into the ICU.” After Modi became prime minister, hot money flowed in and the rupee appreciated briefly. But when it fell again, leaders of the opposition trolled the government by repeating Modi’s phrase: the rupee was in the ICU.

Only a cheaper rupee can spur Indian growth


https://www.ft.com/content/c3a28628-5b92-4db7-a8c2-0f41bea05969


Elite interest favours a strong currency, to the detriment of the nation
ASHOKA MODY

Sadly, the nominal depreciation was not enough. According to the Bank for International Settlements, between 1994 and now, India’s domestic costs of export production have risen by about 60 per cent relative to competitors. As a result, the real exchange rate, which determines international competitiveness, has strengthened by 12 per cent. Vietnamese manufactured exports, following the East Asian playbook, are poised to exceed India’s manufactured exports.

India’s accumulated cost-of-production disadvantage requires the rupee to drop to about Rs90 per dollar; Rs100 per dollar would provide an ideal cushion. But Indian authorities continue to avoid an activist exchange rate policy, and rely on dodgy policy tools: tax cuts and subsidies for corporate India, tariff barriers to shield inefficient producers and weaker labour protections. Such measures simply make the rich richer, while doing little for low-skilled workers. An exchange value of Rs100 per dollar would temporarily give Indian exports a much-needed boost. The time to act is now.

Ritesh Kumar Singh
@RiteshEconomist
India's premature #deindustrialisation: 12 out of the 23 #manufacturing industries that make up the IIP (Index of Industrial Production) are at levels lower than 7 years ago
@moneycontrolcom

https://twitter.com/RiteshEconomist/status/1691499535170674698?s=20


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India's industrial growth falls to 3.7% in June


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India's industrial output grew by 3.7 percent in June, according to data released by the Ministry of Statistics and Programme Implementation on August 11.

At 3.7 percent, the latest industrial growth figure as per the Index of Industrial Production (IIP) is at a three-month low. It is also below the consensus estimate of 5 percent.

Industrial growth had come in at 5.2 percent in May - now revised to 5.3 percent - and was 12.6 percent in June 2022.

For the first quarter of 2023-24, IIP growth stood at 4.5 percent, down from 12.9 percent in April-June 2022 when the data was boosted by a favourable base effect.

Industrial growth in June was dragged down by a weaker increase in the manufacturing output, which rose by 3.1 percent year-on-year compared to 5.8 percent in May.

The performance of the manufacturing sector has an outsized impact on the headline industrial growth number as the sector accounts for more than three-fourths of the IIP.

While manufacturing output grew at a slower pace, that of mining and electricity rose at a faster clip. In June, mining output rose by 7.6 percent, up from 6.4 percent in May, and electricity production was up 4.2 percent. In May, electricity production was up a mere 0.9 percent.

The improved performance of mining and electricity sectors was down the low rainfall in June as drier conditions allow increased mining activity.

"IIP growth print in June has disappointed," said Suman Chowdhury, chief economist and head of research at Acuité Ratings & Research.

"Clearly, the manufacturing sector has not been able to sustain the growth trend that had been seen in the first two months of the last quarter. The manufacturing output grew only by 3.1 percent and actually saw a sequential contraction of almost 1 percent," Chowdhury added.

"Within manufacturing, output in metals exhibited a healthy performance while export-intensive categories such as textiles and wearing apparel continued to remain pressured," noted Rajani Sinha, chief economist at CareEdge.

In terms of the use-based classification of goods, there were some big shocks. While production of primary and intermediate good rose at a greater rate in June - 5.2 percent and 4.5 percent, respectively - there were weaknesses in other spheres, with output of consumer durables falling 6.9 percent in June after rising for the for the first time in six months in May.

Capital goods' output was up just 2.2 percent - down from 8.1 percent in May - while that of consumer non-durables rose a mere 1.2 percent. in May, it had posted a growth of 8.4 percent.

Output of infrastructure goods grew by 11.3 percent - the same as in May.

According to Aditi Nayar, ICRA's chief economist, the performance of most high-frequency indicators improved in July relative to June, although there were some laggards in the form of vehicle registrations and finished steel consumption.

"Based on these trends, ICRA expects the IIP growth to witness an uptick to 4-6 percent in July," Nayar said.