If there is one word that drives moods during an economic transition phase, it is "exports". In recent times, Indian export performance has worried industry, finance and government circles alike. Throughout 1996-97, and in the first quarter of 1997-98, depressed export growth has led to question marks on India's ability to compete in the international markets. As the rupee begins to appreciate against the dollar, further pressure is expected on export growth in the coming months.

One of the solutions that has been suggested to the problem of flagging exports is to devalue the rupee. Strong support for devaluation clearly comes from exporters who argue that this will make Indian goods more price competitive in world markets. On the face of it, foreign exchange fundamentals would also seem to support this view: imports have also grown slowly in the last few months and importers' demand for foreign currency has fallen. This is one of the main reasons for the build-up in exchange reserves, which have climbed to over $23 billion, more than 7 months' import cover. In view of this, the FIEO (Federation of Indian Exporters' Organizations) President, Ramu Deora feels that the rupee is currently overvalued, and that a 10 per cent devaluation would rectify the imbalance and in the process boost exports.

Briefly the problem is this: exports grew by an excellent 18.3 per cent in dollar terms in 1994-95 and by 21.4 per cent in 1995-96 but the performance since then has been less than spectacular. In the last fiscal (1996-97) exports increased a meagre 4.01 per cent, and in the first month of this fiscal (April 1997) were actually 10 per cent lower compared with April 1996. There has been some upturn in May 1997, when exports grew by 8.64 per cent (compared with May 1996), but analysts are reluctant to committing themselves to recognising this as a trend. The overall reasons for the slowing down of exports have been well documented and analysed: the infrastructural bottlenecks in production and transportation that make it difficult for exporters to meet deadlines, the high cost of credit in this country, the overall slowing down of world exports, etc. To this can be added the sluggish pace of industrial activity in our own country in recent months, which has decreased the demand for imports and caused foreign exchange reserves to build up.

The government has made some effort to tackle this last; it recently announced several schemes to offload the large foreign exchange reserves - increased allowances for foreign travel, study and employment. But these are hardly likely to have the effect on the exchange rate that is needed to spur exports; more fundamental measures to stimulate demand in the economy are needed, so that import demand can pick up. This will increase the demand for dollars so that the rupee becomes weaker or, what is the same thing, it is automatically devalued - if not by 10 per cent which is quite steep, then by around 2 to 3 per cent.

However, a fall in the dollar value of the rupee could have other affects on the economy, and these could negate any benefits that arise from the initial devaluation. As Dr B B Bhattacharya of the IIFT (Indian Institute of Foreign Trade) points out, the flip side of a fall in the dollar value of the rupee would be increased costs for importers - and this would raise production costs for exporters who have a large import content in their products. Gems and jewellery, particularly, which account for approximately 14 per cent of total export earnings, have a large import content. Studies show that for every 10 per cent depreciation in the value of the rupee, only 6 per cent of the benefits accrue to exporters; the other 4 per cent is eroded by increased importers' costs. Also, changes in the exchange rate affect the current account in one direction and the capital account in the other says Dr Suresh Tendulkar of the Delhi School of Economics. So, a devaluation of the rupee, which would lead to an outflow or export of goods, would result in a huge inflow of foreign exchange via increased export earnings and better arbitrage and speculative opportunities. It would require massive intervention by the RBI to sterilise these inflows in order to prevent them from adding to money supply. If the RBI doesn't sterilise the inflow of foreign exchange, the increase in money supply will be inflationary; the consequent rise in domestic prices would thus erode much of the price advantage that exporters had gained from the original fall in the value of the rupee. In other words, there is a danger that other economic targets will go off track.Neither does empirical evidence support a depreciation in currency to boost exports. A recent IIFT study tracked the response of export to changes in exchange rates among the leading 23 exporting countries in the world. In only 12 cases did exports increase when exchange rate values fell; in 7 of the countries, exports actually increased in the period when the currency appreciated, and in 4 cases a depreciation in the currency led to a fall in exports. Significance tests showed that less than 10 per cent of the variation in exports can be explained by variation in exchange rates.

It then looks as if efforts to meet the 15 to 20 per cent increase in export targets have to be made in other areas. In the short term, feels Dr Bhattacharya, policy would be better directed at improving the enabling environment that domestic producers face, and this would greatly reduce transaction costs. All the various systemic inefficiencies in the economy which increase these costs have to be removed. This is in the government's hands. What may not be so much in their hands is to increase the access of Indian exporters to markets abroad, in the current world climate of eco-labelling, anti-dumping movements, and other non-tariff barriers.

Some moves have been made for this. The recent setting up of the Export Promotion Board has made exporters feel less out in the cold. The FIEO is hopeful that with this, many of the problems that have been plaguing their constituents will be ironed out. For example the lacuna between the Department of Revenue and the DGFT (Director General of Foreign Trade) which has in the past caused massive headaches for exporters hopefully will now be bridged. It also helps to have as a finance minister, the ex-commerce minister, who is familiar with the workings of the commerce ministry. In the final analysis, however, the real answer lies not on the financial side - devaluation, but on the real side - improving the competitiveness of our exports through improving quality, productivity and through cost cutting. "The competitive edge is given by wage in relation to productivity, says Tendulkar. "Wages are low in the country, but so is productivity, which is why we lack competitiveness."

Improving the competitive edge has become especially important now because there has been a huge build-up of export capacity in the East Asian economies, just when there has been a cyclical downturn in import demand in the world's major markets. This has forced the East Asian countries to cut prices almost to dumping levels and Indian exporters have been unable to compete. In the long term, it is this problem that has to be solved. A devaluation can only be a temporary solution.