Is the fall in value of rupee a good thing for the Indian economy?

The rupee has been falling steadily against the dollar. It has touched an all-time low of Rs 69. Should India celebrate this fall or be worried? The debate is quite old but recently many government officials as well as experts began arguing that it is the best thing for India's exports.

While it needs to be understood that no liberal economy in the world can contain the fall or rise in the value of its currency, the government needs to be honest about the impact that its currency's movement - on either side - will have on the economy.

In this backdrop, it is important to assess India's export capabilities vis-a-vis its import requirements. If the value of our imports is less than exports, then a depreciating currency will add to India's advantage.

Unlike China, Germany, Russia and South Korea, India is a trade-deficit country. This implies that we import more goods from outside than we export.

But in economics, if a country's currency value goes down, its products become competitive, which, in ideal situation should lead to more exports, reducing the trade deficit.

But that does not seem to be the case with India. Here's how.

An analysis by Axis Bank of India’s textiles exports to the US shows that between 2012 and the first half of 2018, India’s share of US imports rose to just 6.5%-7.5% while those of Vietnam rose from 7% to around 12%.

Does India's 7.5% rise in textiles exports appear to be neck-and neck to Vietnam's 12% rise in exports? Hold on. While Vietnam's rise in exports to the US were achieved on the back of 10% depreciation in the value of Vietnamese Dong, it took a 30% fall in the value of rupee to grow at the level quoted above.

This analysis suggests that there is no correlation between the fall in the value of currency and the share in world's exports.

Over the years, despite having a weak currency, India has lost its exports markets (especially textiles) to countries like Bangladesh, Vietnam and Philippines.

Apart from the value of the currency, there are factors like quality, cost of labour and economies of scale that plays a big role in increasing the share of a country's exports in world trade.

But this is just one side of the story.

While it is proved that a weak currency is not helping India compete with other nations on the export front, India's heavy dependence on imported oil for meeting its energy demand is creating serious trouble for the country's economy.

India purchases 80% of its oil requirement from outside and crude oil imports account have the largest share in India's import bill.

India’s crude oil import bill rose by 25% 2017-18 to $88 billion from $70 billion recorded in the previous financial year due to rise in international crude oil price. The average price of India's crude basket was up 19% at $56.43 per barrel in 2017-18, from $47.56 in 2016-17.

If a rise of 18.65% in the value of India crude basket can increase India's import bill by 25%, imagine the cost escalation for India if the Indian basket cost goes up by 30% for the full year (In June, 2018 Indian crude basket was at $73.85 for a barrel).

Certainly, the advantage that Indian exports get from a weak rupee is eroded by the disadvantage that comes from higher import bill.

Here’s an example of how badly a weak rupee affects Indian economy when crude oil prices go up in the international market.

India's merchandise trade deficit increased by 45% to $157 billion in 2017-18, the highest since 2012-13. The expansion in imports was almost twice as high as growth in exports in 2017-18.