Cheap currency, costly illusion

THERE is a comforting story we tell ourselves about exports — that the rupee is the lever, and the zealots suggest that if only it were allowed to fall far enough, our factories would roar back to a state of competitiveness. It is a tidy theory, and an attractive one, because it locates the problem outside ourselves. It is also wrong, or at least dangerously incomplete. It is one valve in a larger system. And a country that keeps reaching for it while the pipes corrode elsewhere will find that the water never quite arrives. The evidence is unsentimental. Research by the State Bank puts the responsiveness of our exports to the exchange rate well below one — a one per cent appreciation in the nominal effective rate trims export demand by only about 0.56pc. But the more decisive number is the import content of what we sell. Roughly 37pc of our export value is itself imported: about 24pc in raw materials such as yarn, fibre and PTA (purified perephthalic acid), and 16pc in capital goods. Textiles, around 55pc to 60pc of what we sell abroad, are the most import-hungry of all. So when the rupee falls, the cost of the very inputs that exporters depend on rises almost in lockstep, and the price advantage we thought we had bought, is quietly clawed back at the customs counter — while the buyer abroad also demands his own pound of flesh from it. This is why currency, in any honest weighting, deserves perhaps an eighth of the explanation, and not the lion’s share. The heavier weights belong elsewhere. Energy is the binding constraint: our industrial tariffs of roughly 13.5 cents to 15 cents per unit tower over India’s 12.1, Bangladesh’s 8.7, Vietnam’s 7.5 and Malaysia’s four cents. For a textile mill, that gap is the difference between winning an order and losing it to Dhaka. Then come the other levers: productivity and the climb up the product ladder; trade facilitation, where every day shaved off a customs delay lifts trade by roughly 1pc; a tariff structure that does not ta