How much will Indian exports go up?

The rupee is lower, but don’t expect a very elastic supply response.  Here is one set of comments:

These [sectors] suffer in particular from numerous domestic obstacles, from overly-restrictive labour and land-acquisition laws to poor supporting infrastructure in areas like power and roads, which make rapid ramp-ups in exports difficult.

Other industries suffer from similar constraints. DG Shah, secretary-general of the Indian Pharmaceutical Alliance, a trade body, says new domestic regulatory impediments, including limits on clinical drug trials that make exports to western markets more difficult, could negate any boost from the plunging currency.

“I’m not entirely convinced that the conditions about the responsiveness of exporters to depreciation mentioned in economics textbooks hold true in India, given these problems,” says one senior Indian policy maker, who asked to remain anonymous. “So its not impossible exports in the round could even go down, which would be a disaster.”

Keep in mind that the Indian growth rate fell from over eight percent to 4.4 percent in not much more than a year, and without any huge noticeable, underlying shock to aggregate demand.  That likely means the Indian economy is supply-constrained and that ongoing growth bumped it up against a very steep portion of a bunch of marginal cost curves.  That limits future export potential.

Alternatively, you might see the Indian economy as oscillating across multiple equilibria.  Further bad news for the rupee could serve as a negative sunspot and indeed we already seeing year-to-year declines in manufacturing activity as of August.  On the brighter side, Indian exports are up 12 percent year-to-year as of July, but it is not obvious that a declining rupee will bring continuing gains through this channel.

There is also this problem:

A look at our major export items suggests there is a change in its composition from price-sensitive items such as leather footwear, dairy products, beverages, textiles and apparel, to less price-sensitive items such as refined petroleum products, chemicals, mineral products (especially, mineral fuels, bituminous substances, etc.), and machinery and transport equipment (engineering goods).

The share of petroleum products in India’s export basket increased dramatically from around 2 per cent in 1993 to around 20 per cent in 2012. The surge in exports in the case of petroleum items is because of India’s potential in oil refining activities.

On contrary, India’s CAD is likely to increase further as oil and precious metals still contribute to bulk of our imports. Controlling CAD is an important factor from the perspective of sovereign rating.

Fortunately, IT exports do seem to be doing well.  More NRIs will be planning weddings in India.  Elsewhere, the trade in processed Indian human hair with Bangladesh is hitting some bumps.  It is also becoming much harder for Indian students to invest in education abroad.


What matters for contagion is falling imports, either through export substitution or economic contraction/loss of purchasing power. Since the global economy is in a deflationary period, the losers are the nations with excess capacity; and nations that "gain" from currency devaluation will do so through import substitution. Otherwise, you join the beggar thy neighbor game and get hammered every time the next currency collapses in value.

Here's a paper (gated) from Yu Hsing that goes into detail about whether the Marshall-Lerner condition is met for a set of Asian countries in 2010. It's econometric so problems of significance and data quality are big – nonetheless it should give us pause about depreciation in India, as its success depends on your deflator (PPI vs. CPI).

What I find somewhat underdiscussed today is that dollar-priced petroleum products are crucial for all Indian growth and sustainability of its fuel supply. India has its own production, but almost all growth will be coming from imports. These are both naturally and artificially inelastic. Naturally for any number of reasons why demand for oil is inelastic, and artificially because of the public choice factors that demand fuel subsidies.

Of course

That adds one more feedback in the rising rates-government deficit system. I've talked about this here:

The Hindu article talks about this, but it perhaps deserves more attention. External debt in India is low – as many people have no problem pointing out – but a captive demand for dollar-denominated oil is similar to such in more ways than one.

In any case, I don't think this is a big structural problem, and India has plenty of low hanging fruit on its table.

The Marshall Lerner condition clearly doesn't hold, because the rest of the world obviously has completely unstable current accounts. Probably nothing wrong with Indian, or anybody else 's economic policies. :-)

If you can get your hands on the Hsing paper you'll see there's nothing "clear" about this question. Here's a quote from the conclusion:

"As the US real income declines due to the global financial crisis, the trade balance for Japan, Korea, Malaysia, Pakistan, Singapore, or Thailand will deteriorate whereas the trade balance for Hong Kong or India may or may not deteriorate depending upon whether the relative CPI or PPI is used in deriving the real exchange rate."

That's from 2010, but structurally I don't know if much has changed. In any case, we would normally expect the condition to hold, at least I have a pretty strong prior to that effect. I've just been a bit worried about the nature of oil obligations which functionally are eerily similar to external debt.

In any case, this doesn't bode well for the primary balance..

For another perspective:

Shouldn't the title of this post be, in light of the questions it raises: How low does the rupee have to go?

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