Competitive rupee, open capital account necessary to boost exports: Economic Survey
NEW DELHI: A competitive exchange rate and open capital account will help in boosting exports, the Economic Survey said indicating that independent monetary policy hasn't been able to achieve the vital economic goals. The rise in the rupee's real effective exchange rate (REER) in the last four years has eroded export competitiveness especially in the absence of any special package to boost exports, it said. "The Indian economy's competitiveness has had to contend with the real effective exchange appreciating about 21 percent since January 2014. Policymakers have struggled to come to grips with the international trilemma, whereby an independent monetary policy and an exchange rate objective cannot co-exist with an open capital account," the survey said.
Between January 2014 and November 2017 the rupee's REER which is a weighted average of nominal exchange rates adjusted for relative price differential between the domestic and foreign countries, has increased to around 121 from 100 which has hit exports.
The comment from the economic survey comes at a time when India's export growth has lagged its Asian peers. India's exports grew 9.5% in this fiscal so far, whereas for Vietnam, South Korea, and Indonesia it was way higher at 23.8%, 18.4% and 17.8%, respectively.
The survey pointed out to the Government's special Rs 6000 crore package for clothing exports with rebates on state levies. To offset indirect taxes levied by states. Readymade garments exports surged after the announcement of the package.
"The issue is that both competitive exchange rates and open capital accounts are helpful for growth. Changes in price competitiveness can make a major difference to export performance as highlighted in the Government's export package for clothing. At the same time, open capital accounts attract foreign saving, providing additional funds for investment, which can help growth," the survey said.
"There is economic evidence suggesting competitive exchange rates are more important for export-led growth. At the same time, domestic political economy of exchange rates favors an open capital account and a stronger, less competitive exchange rate," the survey said.