Home > Uncategorized > Agricultural Exports: Making INR a strong currency

Agricultural Exports: Making INR a strong currency

 

 

India has never had a freely convertible currency since independence.  We therefore have no way of knowing its true value in the international markets.  The currency’s day to day value is loosely determined by demand supply in the local currency markets open only to domestic players and a few authorized foreign banks with in a band set by RBI.  The average level of Indian Rupee [INR] was 44 in 2007 before the world’s financial crisis began.  INR has hovered between 38 and 46 to the Dollar since 2007.  Recently it shot up to 52 raising a hue and cry in the markets.  Indian inflation has raged between 8% and 15% since 2007, depending on which measure one uses, while most of its trading partners have been in a near deflation.  On an average the inflation differential between India and its trading partners can be assumed at roughly 10% pa.  Over a 4-year period, if 44 were a fair value for INR in 2007, then it should be close to 65 today.  Going by inflation differentials, even at 52, INR is overvalued by 25%.  Why is it that India’s middle class prefers a “strong” Rupee even if it is overvalued?

 

 

In India’s socialistic era, all foreign exchange earned by Indians, exporters or others, was preemptive purchased by the State at an administered price.  Importers not only needed an import license to import anything from abroad, but also had to buy the foreign exchange from RBI, again at an administered price.  Since the administered price of the dollar was way off INR’s true value, importers, exporters, and domestic producers and consumers are impacted differently by this mechanism.  The State used the administered price mechanism to promote domestic industry as the best way to modernize the economy.  Since the industry required a whole host of imports, in terms of plant and equipment, technical knowhow and raw materials, it was the biggest single buyer of dollars in the market.  Hence the State was obliged to keep the Rupee artificially overvalued in order to provide inputs to industry at the lowest price possible.  This socialistic concept has persisted in our collective mindset ever since Nehru drilled it into the national psyche.  We have still not fully recognized the baneful impact of such over-valuation of the INR.

 

 

India’s export basket at the time of independence was largely agricultural commodities like cotton, jute, sugar etc.  Nehru’s love for industrialization meant that these sectors were underpaid for the dollars earned by them and the benefit passed on to industry.  In other words, Nehru’s policy taxed exporters of agricultural commodities to give subsidy to industry.  Nehru’s idea was that industry would create jobs thus shifting labor out poverty in the agricultural sector to better paid jobs in industry.  As with most well meaning State intervention in an economy, this woolly-headed idea worked perversely.  In practice, the policy impoverished the farmers who actually produced something worthwhile and reduced wages to poor agricultural labor.  On the other hand, it added to the unearned profits of industrialists, while the jobs created in industry largely went to the lower middle class and not the poor agricultural labor.   Net net, a policy designed to help the poor actually increased poverty.  Nevertheless the argument for industry is so deeply entrenched in our discourse that to argue otherwise is deemed unpatriotic.

 

 

The first order of business in the reform package of the 90s was a haircut devaluation of 20% that slashed away a substantial portion of the hidden subsidy that industry had enjoyed.  It also raised prices for the imported goods consumed by middle class consumers who craved quality goods from abroad.  However, this price increase was a one-time affair.  If for instance the price of cars went up, the number of factories to produce those cars went up too.  So did the middle class wages and in time the affordability of cars & car ownership increased, not decreased.  Hence, the one-time cost realignment is usually a temporary dislocation that should not worry either Government or consumers.  Industry over time learned to live with less subsidy and those that were grossly inefficient, went out of business.  20 years after the first currency reform, there will hardly any people left who will argue for currency controls of the socialistic era.  However, our currency is not yet free and gross over valuation still persists.

 

 

One of the biggest success stories of our liberalization has been the growth of our software services industry.  It is the employment created by the software industry, and not just its profitability, that has brought prosperity to millions and help drive consumer demand in diverse industries such as cars or housing.  Software services have been the true driver of incremental growth that has propelled the GDP growth rate from 4-5% to 8-9%.  What lies at the heart of our success in software services?  Simply put, it is labor arbitrage.  An average programmer in the US or EU costs 10 to 20 times her equivalent in India.  Technology makes it possible to replace highly paid US labor at a small fraction of the cost in India.  And that labor saving is shared in reduced costs for businesses outsourcing work to India and profits for the firms providing such services from India.  It is that simple.  In fact software services grew out of what we now call body shopping!  The sector is one way to convert our natural advantage in low labor costs into a profitable export business.  That is the key take away from the software services story after first generation currency reforms in the 90s.

 

 

If low cost labor arbitrage is our key strength, can we not use the same model to build profitable business in other sectors?  People are trying that in areas such as legal services, design and engineering, accountancy, etc.  However, our biggest pool of labor, the unskilled and semi-skilled labor in rural areas and small towns is still not the focus of development.  Agricultural production for exports represents our single biggest opportunity to use this pool of poor people not only to earn profits but also lift them out of poverty without wasteful subsidies.  So why don’t we produce agricultural products like, corn, vegetables, sugar, wheat, rice etc. in greater amounts for the export markets that sucks in this pool of labor much as software exports sucked in our unemployed graduates?  What prevents us from arbitraging our unskilled and semi-skilled labor profitably?

 

 

The US and EU have long had import quotas that shut out agricultural exports from countries like India even though Indian products would have been much cheaper.  That constraint has now vanished with China emerging as the largest importer of agricultural products sending commodity prices to all time highs.  So market access is no longer the constraint it was.  What we need is reforms that help organize production for export by the private sector.  That means allowing the private sector to lease land from farmers, breaking up the cartels in Agricultural Produce Marketing Committees, allowing the corporate sector in multi-brand retailing, warehousing etc.  It also means creating infrastructure at our ports for export.  All these are can be done with some concerted effort at reforms.  The intriguing question is if the steep currency devaluation now underway and the reforms in retailing lined up are part of a package designed promote agricultural exports?  Our ability to propel ourselves into a new orbit of growth critically depends on further currency and agricultural reforms.

 

 

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Categories: Uncategorized
  1. November 28, 2011 at 11:39 am

    Solid arguments there Sonali. I am however, not sure about
    “That means allowing the private sector to lease land from farmers, breaking up the cartels in Agricultural Produce Marketing Committees, allowing the corporate sector in multi-brand retailing, warehousing etc. ”

    Corporate sector (including the big global chains) are more interesting in domestic demand / market and not so much on exports IMO. The local corporates like Biyani group have also including not so successful Birlas ‘More’ focused on domestic market really. Why would one export out of India where labor productivity and poor ‘public’ infra really is a big bottleneck. a good corollary would be manpower intensive industry like shoe making where India seems to be loosing the game to china earlier and now Vietnam.

  2. November 28, 2011 at 1:23 pm

    Your point of reforming agriculture exports is well intentioned. But, in current economic condition and at the level of current annual yield that India produces, I would say it would be jumping 5 steps at a time. Indian Government must first reform the Agri sector itself as it is marred by many issues:
    1. We are still largely dependent on good Monsoon for irrigation. An sound irrigation infrastructure is necessary.
    2. Our logistics and delivery infrastructure need to be revamped. This aged multi-layered supply chain is exploiting both farmers and consumers.
    3. Tons of food grain is being rotten due to inadequate storage facilities.
    4. Government has opened many Krishi-kendras for facilitating local farmers across the country. But, still, barring some states like Punjab, many farmers have no knowledge of modern technique of farming. The need is here to develop a proper system to train local farmers. To give them know-hows of current practices in technology, seeds, machines, etc.
    5. Food Security of domestic market must me met.

    After then we would be set for reform in agri-export. On the side note I believe that agriculture sector should not be privatised, but should be controlled by Government whereas private players would work as an incentive partners.

  3. Krishna Kumar menon
    November 28, 2011 at 2:17 pm

    Great insights and arguments.

    The problem, as we all know, is inefficient effective supply chain mechanisms and infrastructure between the Farmer & the Wholesale & the Retail ends.

    Even marginal improvement here can result in huge efficiency gains at the retail level. However agricultural prices at the retail level have found its water mark and increasing. I am not sure whether any sort of efficiency gains at the level of Wholesale and Farmer will translate as costs efficiencies at the retail end as a bulk of such efficiencies will be eaten away as profits.

    Yes there will be investments required as you suggested at the level of Storage, transportation, Shipping, Technology, etc to enable this transformation and that is something that a part of the FDI must be used for. The question is how much % must be allocated for that from the FDI.

    A FDI with a controlled mechanism to export agricultural produce to global markets will improve the conditions for 85% of our populace especially when globally we have food crisis and shortage. There is a demand that can be met at a price that makes market sense.

    The question is who will set-up the prices. Produce for local consumption will be market led and so will those that are exported but any improvements here will be eaten away by the big retailers given that it would be exported through those vehicles – what does the farmer who produces them get out of this?

    There could be policies where it is possible provided produce generated over an specific % can be sold at a different price aimed at export markets.

    My take is controlled Rupee devaluation can be considered. That will make our exports better. In other words FDI + devaluated Rupee is a masterpiece of a strategy executed by the government.

    The question before us is probably how can we insulate our markets through effective legislations such that, if a EU crisis were to happen, we should not have a situation where there would be Capital flight out of our country leading to infrastructure breakdown and market collapses. The resulting impact to society and economy are too big for our country to absorb or contain.

    I believe the 51% or greater FDI guidelines has to be seen in the light of economic risk exposure. I am not convinced based on the available data-points that this will work for us. Although the possibilities and opportunities are immense if managed well.

  4. November 28, 2011 at 2:55 pm

    I fully agree with Ms. Sonali. To grow we need to come out of our old way thinking. In the path of growth, there can be small few falls, and those who fear never will be be able to stand up, leave alone going forward. .

    read my posting “The Bitter Pills for India Reprieve” which I wrote and published in 2oo4 and modified alter after 26/11.
    Part 1. http://wp.me/p1ZsI2-1O Part.2. http://wp.me/p1ZsI2-1S

    Succumbing to Hippocratic groups or thoughts will not take us anywhere. It all make us seen as a meek and indecisive country to others.

    There shall be proper control on FDIs. India is capable of managing Food supply chain and funding it ourselves.
    Like I mentioned, if necessary some drastic measures such as banning of 24 Ct. gold, confiscating it beyond an allowed limited quantity giving 10 year fully convertible cash bonds, peg Rupee with value of Gold, print enough money for budgets that need to be many fold higher than the current ones for enabling growth in every phase that are bursting for years to grow.

  5. silly
    November 28, 2011 at 10:39 pm

    don’t you think before that Indian need free access to global financial market , so they can buy any thing or borrow from one ? or invest in any place ? any exchange or market

  6. Dan
    October 12, 2012 at 10:27 am

    And I also know thet in the United States the Agricultural Marketing Service (AMS) is a division of USDA and has programs for cotton, dairy, fruit and vegetable, livestock and seed, poultry, and tobacco. These programs provide testing, standardization, grading and market news services and oversee marketing agreements and orders, administer research and promotion programs, and purchase commodities for federal food programs.
    Here agricultural raw material supplies on http://bidethiopia.com you can get free bids and can find a lot of information about agricultural raw material supplies

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