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Q. Falling exports and solution: To counter the falling exports instead of devaluation, policy makers should focus on policy imperatives. Discuss.
Sep 20, 2016 Related to : GS Paper-3

Ans :

Introduction-

In the last 21 months, exports from India have fallen in 20 months. India’s merchandise exports are shrank by 0.3% in the month of August compared to same month in last year.

Issues-

  • Even though exports are falling, but the balance of trade appears healthy because imports fell 14%, in the last 21st consecutive month of this trend.
  • Exports are dented not only by global recession, but also due to low productivity and poor policymaking.
  • Falling imports, especially of non-oil, non-valuables that include capital goods, which shrank 3% year on year, which shows the lack of appetite to invest in India.
  • In this backdrop some experts are suggesting for government for currency devaluation to encourage the exports and investment.

Issues for evaluation of currency-

  • In current economic scenario, rupee is poised to slide against dollar. Similarly it is estimated about $20 billion will flow out of India as redemptions for foreign currency non-resident bonds.
  • This will put pressure on the rupee, whose exchange rate is set by the market, the RBI only dampening volatility.
  • Similarly much of Indian exports have imported components, so devaluation will actually import inflation, and which in turn makes exports uncompetitive.
  • It is expected that in the month of December, the US Fed might start hiking interest rates, triggering a dollar outflow, which may further weakens the rupee.
  • Hence instead of focussing on currency devaluation, India needs focus on policy imperatives by bringing wide range of reforms.

Suggestions-

  • Various domestic producers are crippled due to steep duties on imported raw materials while duties are lower on finished imports. Hence this issue should be addressed by scrapping inverted duty structure.
  • It is better to extend the same rate of effective protection to all sectors and have the same low rate of import duty for all products.
  • There is need to build better infrastructure facilities like roads, ports. Similarly registration process must be made simple by minimising paperwork.
  • Regulation framework and quality must be improved properly and needs to curb unnecessary harassment by regulatory authorities.

Conclusion-

Currently India is witnessing slowdown in exports and it has far reaching impact on the trade balance of India. Hence this issues needs to be addressed effectively. Devaluation of currency as suggested by many to tackle this issue is not solution, rather it has negative consequences. Hence Policy makers should focus on policy imperatives and reforms, instead of currency devaluation.


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