Dr Ajay Shah, Professor at IGIDR and Dr RK Dhawan, Chairman, FIEO (Federation of Indian Exporters Organization) debate if the long-term rise of the rupee is inevitable and if a strong rupee will help or harm the economy in general.
Both agree that while, the government is managing the exchange rate, the currency also has to be left free to respond to market forces.
Q: The known friend of the market and a liberal rupee, what would your argument be - do you think the RBI should have intervened or do you think the market should find its own level of the rupee?
Shah: The point we should understand is that intervention by the RBI is not free, it is a costly policy. It comes at the cost of local monetary policy and one can make a good case that it is a key factor, which has given us an upsurge in inflation. Hence, the country has to make a call if it is important to subsidies exporters. Or if it is important to use monetary policy to stabilise the business cycle and inflation.
Q: Would you say that Indian exporters should tighten their belts and learn to live with the market or do you think this crutch of intervention is still needed?
Dhawan: Many of the exporters are diverting their products to the local market, because they find it difficult to continue at this pricing. Government's intervention is a must and if the government doesn't intervene, they will lose the exporters from this country. We have already lost Rs 5,18,000 crore last year and there is a loss of Rs 50,000 crore so far.
Q: According to Mr Shah's arithmetic, from 2002 to 2007 inflation made our exports more expensive by about 15-16%, and over and above that rupee appreciation of 10-12%.
The Indian exporters had logically become more expensive by 30%, nevertheless exports have tripled over the last five years. So why are exporters complaining? Probably Indian exporters are capable of withstanding competition?
Dhawan: I may be a rich person but as a businessman I cannot afford to work at a loss. The situation of an exporter is so bad that, like farmers, they are going to commit suicide and many have already suffered crores of rupees. We are not talking of rich exporters only, but of hundreds of exporters who are very small in this country.
Q: While one takes the point that exporters have been nimble, so far exports also create a lot of jobs and a lot of textile, engineering exporters are working on single digit margins. So is it not incumbent for the policy of the day to ensure that exporters also don't commit suicide like farmers?
Shah: If helping exporters was a free lunch, then I would be all for it. I am not saying that it is bad to help exporters, I am just saying that the country has to make a call. Do you want a monetary policy that deals with inflation, that stabilises inflation, do you want a policy that delivers 3% inflation or do you want subsidised exporters?
Q: But don't we always have to marry these difficult partners?
Shah: No, in an open economy, in macroeconomics, unfortunately, it's a stark choice. When you look on the global scale, the mature market economies of the world have Central Banks who have completely got out of the currency market.
So it's not true that we have to inexorably muddle along. Infact, the choices faced are quite stark and drastic for monetary policy to function properly. It must be freed from the task of managing the exchange rate. It generates confusion and noise, it destabilises financial markets, it distabilises inflation.
For monetary policy to do its job and inflation to be anchored, there is a cost to be paid, which is, that the currency has to be left free to respond to market forces. I would argue, that there are two things going on there, there is a level story and there is a volatility story. The level story is a onetime cost that RBI was trying to hang on to Rs 44 a dollar in February, which has gone and we are at around Rs 40.5 now. The volatility story is that we need much more development of a currency derivatives market, so that people can handle that currency volatility.
Q: If the rupee is indeed not protected, is FIEO taking any steps?
Dhawan: The exporters are agitated; they are telling us that we should learn something from the developed countries. There, they offer agriculture subsidy to the extent of billions of dollars and here we only talk of inflation. In fact, in 1992, a similar situation arose and the currency was exchanged at 60:40 ratio.
Why can't they do something like that for the exporters? The exports, like FDIs, find the local market and do their business here, is that what the government wants?
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