LET US start with the first salvo fired by the new Finance Minister – devaluation. With two strokes of the pen, the Indian rupee, and hence Indian goods, have been made 20% cheaper in the international market, while major foreign currencies and hence foreign goods have become that much dearer. The government says this will inhibit imports and encourage exports. But what does our experience say? What has really been the relation between the value of our currency and our foreign trade?

  • Between 1947 and June 1966, the value of Indian rupee was held constant vis-a-vis all major world currencies. During this period our exports grew by 100%, imports grew by nearly 175% and trade deficit by 500%.

  • Between June 1966 and 1989, the Indian rupee underwent a total devaluation of nearly 400% vis-a-vis the US dollar, i.e., the dollar became nearly four times dearer, while exports grew by 300%, imports grew by 200% and trade deficit by 1,200%.

  • As for our share in global exports, it is steadily declining. From around 2% in late 40s, it fell to nearly 1 % in mid-60s and further to less than 0.5% by the late 80s.

Clearly then, on a long-term basis, devaluation has certainly not helped either promote exports which depend more on other factors like the quality of products and the international trading environment or check imports which are governed primarily by the thrust of the domestic economic policies.

True, there was a temporary positive impact of the drastic June 1966 devaluation on our trade front when our imports remained largely constant while exports grew culminating in a rare trade surplus of Rs, 104 crore in 1972-73 before it was all wiped out by the first oil shock of 1973. But here it must be remembered that while imports were curtailed due to growing self-sufficiency in foodgrains, the growth in exports was confined to our traditional strongholds of raw materials and primary products like tea, jute, cotton and mineral ores which we have been sending out of the country since the days of Queen Victoria – surely not a healthy sign.

Now after the present devaluation, the question we are facing is how to increase our exports to a level where our overall earnings would more than offset the fall in prices. Let us look at the factors that are likely to affect our export prospects today.

  • Domestically, due to the already rising prices of raw materials as also the hike in the bill for imports (due to the same devaluation) required by Indian industries, our exports, especially items with a high import-content, may not necessarily become cheaper abroad.

  • Whatever positive impact devaluation is supposed to have on a country's exports is only when there is a boom in worldwide trade. Under the present situation of falling demand in global markets coupled with strong protectionist barriers put up by 'free trade' champions like the US and stiff competition from other Third World exporters, we may as well end up selling less and selling cheaper!

And on the import front, it must be remembered that unlike in June 1966 this time devaluation has taken place in a climate of total import liberalisation. According to the new trade policy, every exporter is entitled to import anything worth 30 to 40% of his export earnings no matter whether such imports have any bearing on his exports. Earlier, this import-for-replenishment facility was restricted only to selected exports and that too to an extent of 5 to 20%. The Budget has also done its bit of import promotion by giving a concession of Rs. 822 crore in customs duty. Evidently, with no limits on external borrowing and the huge funds the corporate sector is flush with, just making imports costlier cannot check imports. If anything, devaluation will only hike the import bill and leave the burden of trade deficit far more menacing.

So, at the end of it all we are likely to be left with the same import and export trends continuing unabated. In other words, the deficit soars and we have a highly inflated debt burden. Already, the latest two-step devaluation has raised our debt burden by nearly Rs. 35,000 crore!