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Does Weak Rupee Matter for India's Manufacturing Exports?

  • Bhanumurthy, N.R.

    ()

    (National Institute of Public Finance and Policy)

  • Sharma, Chandan

    ()

    (Indian Institute of Management)

The role of weak exchange rate in stimulating exports is a foregone conclusion both at the theoretical as well as in empirical literature. This is more so in many of the emerging economies that are pursuing export-led growth strategy and led to currency intervention to contain any appreciation. In this context, this paper tries to empirically re-examine this issue in India as the recent trends does not suggest such relation between exports and exchange rate. The analysis is undertaken at two levels: at macro-aggregate level by using some time series models; and at the micro-firm level from the Indian manufacturing industries. At the macro level, by using both annual and monthly data, this study finds that exchange rate does not have theoretical (positive) relationship with exports. Rather it finds a negative relationship, which is unconventional. Further, it is also found that imports and the import tariffs playing a major role in boosting exports growth in India, thus indicating `import-led exports growth' mechanism. Subsequently, the paper examines the relationship between exports, imports, exchange rate and productivity using a panel of firms from the Indian manufacturing industries. Results indicate that, although imports and exports are inter-linked, import intensity, rather than exchange rate, is a major factor in boosting exports as well as productivity. Hence, this paper argues against currency intervention to maintain weak exchange rate as a policy option for export promotion. Rather, as exchange rates have differential impacts, we argue for sectoral policies, instead of exchange rate intervention, for enhancing productivity and, hence, exports in manufacturing sector.

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Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number 13/115.

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Length: 25
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:npf:wpaper:13/115
Note: Working Paper 115, 2013
Contact details of provider: Web page: http://www.nipfp.org.in

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