Rupee@80: The Story Can Get Grimmer

Depreciation may not help exports because the composition of what we sell has changed

- Nilanjan Banik

Rupee falling below the 80-mark against dollar made headlines. There are nuances in story that, however, are being missed.

First, and contrary to what many are saying, rupee fall may not help our exports. Here’s why.

● Exports of commodities that are price sensitive, that is, they do well when they are cheaper, benefit during depreciation. But exports of goods that are income sensitive, that is, they tend to perform well when there is an upsurge in foreign income, may not necessarily do well. For example, if incomes in foreign countries are under pressure.

● In case of India, there is a change in composition of exports from price-sensitive items such as leather footwear, dairy products, beverages, textiles and apparel products, to more income-sensitive items such as refined petroleum products, iron and steel, chemicals, machinery and transport equipment (engineering goods), and pearls and precious stones such as diamonds.

● However, weak global economic growth means lower demand for income-sensitive items that comprise a major chunk of India’s exports basket.

● As per July 2022 estimate, real GDP growth in the Euro Area is expected to fall from 5.4% in 2021 to 2.3% in 2022. In China, India’s another major trading partner, GDP growth rate is likely to come down from 8.1% in 2021 to below 5% in 2022. The US is also witnessing a surge in inflation (above 9%) denting the growth in real GDP.