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A partial redress

The Government of India’s announcement of a package of concessions for exporters was widely anticipated, especially with the recent appreciation of the rupee becoming politically sensitive. Since April, the rupee has appreciated by about 8 per cent, from a level of Rs.44 to the dollar to its present trading range of Rs.40 to Rs.41. Exporters and their trade associations were complaining that their competitiveness was being eroded by the dearer rupee. Particularly vul nerable are the small- and medium-sized export enterprises. There is a distinct possibility of widespread job losses. Already, there are reports of many diamond cutting and polishing units in Surat closing shop. Many export-oriented industries, including textiles, are labour intensive. The real question, therefore, was not whether such a package would be forthcoming but what would be its magnitude and content. The Rs.1400 crore-package has two broad relief components — interest cost on bank loans and duty drawbacks. Export credit, both pre-shipment and post-shipment, will be cheaper by two percentage points. The government will provide a subsidy of approximately Rs.600 crore. Duty drawbacks, a mechanism by which exporters get back a part of duty paid on inputs, have been raised in certain cases and that will cost the exchequer between Rs.500 crore and Rs.600 crore. Any package such as this is bound to be selective and cannot satisfy all the affected sections.

As for the bigger picture, trade data for the first two months of 2006-07 show a sharp widening of the trade deficit even without factoring in the rupee appreciation. There are other pointers too. The Commerce Ministry has scaled down its export target for the year from $160 billion to $125 billion. Besides, global petroleum prices have started rising. Of particular concern is the current account deficit. Without taking into account the inward remittances, it is as high as 4 per cent of the GDP. Software and services exports, an important cushion, have come under pressure due partly to the rupee’s rise and partly to the higher staff costs. While capital inflows continue to keep the balance of payments in surplus, the flood of dollars they represent has been the main cause for the rupee’s rise. For quite some time now the RBI has been on the horns of a dilemma. The costs of the two-stage sterilisation of balances have to be weighed against the consequences of rupee appreciation. Exporters’ woes and the relief package underline one facet of the problem but it is clear that enduring solutions will have to be found after reconciling the monetary policy’s different short-term objectives.

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