New Delhi, Oct. 22: A joint group formed by top representatives from the finance and commerce ministries, Reserve Bank and the Planning Commission has decided on a deliberate policy to knock down the value of the rupee by 5-7 per cent every year over the next five years.
In theory, the exchange rate of the rupee is market determined, but in truth, it is propped up or allowed to fall in a calibrated manner by the Reserve Bank in consonance with government policy.
Currently, the rupee is trading at 48.36 to the dollar; a 5-7 per cent depreciation annually would imply that it would trade at over 50.50 by next fiscal and at way over 62 by 2007.
The decision has been taken keeping in view the dismal export performance. Officials said since exports have a central role to play in the attainment of growth and tax collection targets, it has been decided that the “exchange rate be viewed primarily as an instrument to affect the behaviour of exports at least until such time as the production base of the economy is sufficiently integrated with the global market and exports robust enough to withstand periodic fluctuations in the exchange rate and in international prices.”
One of the underlying, but unspoken, reasons why the government is keen that exports are propped up by calibrating a fall in the value of the rupee, besides the need to boost growth and tax collections, is that the WTO regime will force India to allow entry of more foreign goods over the next five years. In such a situation, the government would like the industry to turn price-competitive with global products during this phase itself.
Officials said the high-level committee’s report, which will also be reflected in the Tenth Plan document to be cleared by the Union Cabinet later this week, said the government will use the rate of exchange as a policy instrument to force both a shift from selling in the domestic market to exports, and developing capacities to specifically target such export opportunities.
Both these conditions are inextricably linked and involve the reduction and eventual elimination of the anti-export bias that has crept into the psyche of the industry. The way to do this would be to keep the exchange rate fall ahead of the rise in inflation. Otherwise, the rise in the rate of inflation acts as an incentive to local industry to remain local as they get better prices in the market.
The government will also be reworking its structure of export incentives so that it is re-oriented towards investment in tradable goods and services and away from non-tradables.
Such an exchange rate strategy would, to some extent, correct the bias against traded items, by leaving the relative prices of traded and non-traded goods more or less unchanged.
Officials said “this should also automatically lead to a depreciation of the Real Effective Exchange Rate (REER) in the 2 to 3 per cent per annum range, assuming that the international rate of inflation does not accelerate from its usual trend rate of 3 to 4 per cent per annum. All in all, this should improve the price competitiveness of Indian goods.
Till now, the REER has been in the region of 1.4 per cent compared with far higher inflation rates, which saw Indian goods remaining in the local markets.