Should India Keep the Rupee Strong or Let It Weaken? A Deep Dive into the Debate:

All this while, a weaker rupee is beneficial for net exporting sectors such as apparel as well as leather goods which are also labour intensive and hence, help in generating employment. Therefore, it’s desirable.

However, the proponents of keeping the rupee strong argue that a stronger rupee favors the exports of automotive, electronics, pharmaceuticals, and refined petroleum products which have significant import content. Thus, stronger currency actually assists in India’s exports.

And they have a point. Exports of products with low import content such as textiles continue to stagnate which suggests that weakening the rupee does not benefit net exporting sectors. Worse still, it makes inflation control difficult as the cost in rupee terms of imported goods, especially crude oil becomes higher.

Nevertheless, this is flawed logic.

Reason for a weaker currency is strength

The electronics, pharmaceutical, and oil industries certainly have high “import content.” While a weaker rupee makes electronic components, active pharmaceutical ingredient (API) as well as crude oil more expensive, it creates an incentive for the export of mobile phones, medicines, refined petroleum products, and petrochemicals. A weaker rupee certainly increases imported inputs, but the value of exports increases because more rupees are earned for every dollar. This provides a natural hedge. The only industries that suffer a weakening rupee are those that use imported intermediate goods and do not participate in the export market.

But that’s not everything. First, a depreciation of the rupee helps promote exporting activity, but it also gives a measure of protection against chinese subsidised exports to the less competitive Indian industries. This strategy is certainly better than import duties designed to protect local industries which are difficult to justify, especially when president Donald Trump is looking to put retaliatory tariffs against nations that have restrictions on American produced goods. This way a weaker rupee reduces the amount of unwanted imports that are brought into the country while at the same time encouraging exports.

Why isn’t a weaker currency helping labour-intensive exports? The focus shifts to how beneficial currency depreciation will be for the export sectors. Even if a net exporting country does benefit from a depreciating currency, the question is why there is sustained underperformance in the apparel and leather goods exports. The answer lies in structural issues, which is a cocktail of domestic policies, which makes dependency on the exchange rate futile in creating any significant competitive advantage. Let us start with garments. Indian apparel exports face too many challenges to sustain any meaningful level. First, there is a stronger rupee, an inverted duty tax structure where import duties on apparel fiber textiles attracts a higher tax than those levied on @[apparel](https://european-american-business-society.hubpages.com/tags/apparel). textiles, and cumbersome quota restrictions on apparel exports.

In Vietnam, the same inverted quotation regimen (outward processing regime) exists as in India. But it also can rely on the FTA with ASEAN, an equally cheap labor market. And the Chinese FTA facilitates a lower cost of fibers and fabrics. They also have a FTA with France, allowing clothing products of Vietnam favorable tax when imported to Europe. Unlike India, who still hasn’t completed FTA discussions with the EU, only to aggravate textile export defeats.

A week rupee cannot fully answer all these problems. The solutions to these problems lie in investment policies which the Indian government through the FDI cap can control. But in curtailing these policies, the government will have to allow depreciation of the rupee. That is something the RBI is constantly intervening to prevent. In the process, we have prevented the INR from being percieved weaker than USD when competing with the Euro, GBP, or JPY.

It is easy to understand that placing tariffs and non tariff barriers on basic chemicals, steel and textile fibers will lead to the export value added products from downstream industries creation not being as successful.

Further, India has to concentrate on not only increasing goods exports, but also services export as well as internal remittances, all of which support a weaker currency, which helps the current account deficit. Also, a typical exporter suffers from domestic sales. There is a 9-10 times larger sales opportunity in exports. 33 trillion vs 3.5 - 4 trillion dollar. Thus, as India's exports does not grow, it will have to obtain a lower gdp growth.

Disadvantage of the combined impact of tariffs, industrial subsidies, and a strong rupee

Superficial manufacturing is preferred instead of deep manufacturing because “super” PLI subsidies, higher import barriers, and a stronger rupee promote it. To avoid paying any import duties, mobile phone manufacturers have established assembling units so that they can take advantage of the 6 percent PLI subsidy. They import components and export mobile phones as “assembled” in these so called manufacturing units. In reality, these units are just assembling units and by taking advantage of the PLI subsidy and avoiding import duties, they make “Made-In-India” mobile phones which are only assembled and not truly “Manufactured-In-India”.

In this regard, the RBI should stop weakening the rupee artificially, and allow market mechanisms to determine its exchange rate with minimal interventions to prevent excessive volatility.

One of the presumably most potent arguments for a stronger rupee is that it curbs inflation, unlike a weaker rupee which increases the cost of imports such as crude oil, fertilizers, and vegetable oils. That is not wrong, however, highly protectionist trade policies, it is argued, have an equally suppressive effect. A stronger rupee, on the other hand, with high import tariffs (and non-tariff barriers) would be in contradiction from an inflationary perspective. Similarly, high excise and state VAT are what primarily keep diesel and petrol prices high, even when crude oil prices steeply fall, not solely the weaker rupee.

It is known well that the fuel taxes were increased to cover the revenue-expenditure gap from the slack in the corporate tax that sought to increase private capex which has not happened. All this while, the bigwigs of India Inc have stalled their capex plans, slashing jobs and wages as the country’s Chief Economic Advisor has noted in order to sustain their profits in a low demand economy.