The pro-devaluationist sentiment however refuses to take a look at the recent record of such competitive devaluations and the effects of those. Devaluation is not an easy remedy for a country suffering from a continued trade deficit. Less so is competitive devaluation.

Devaluation is quite a painful means of adjusting an economy to internal and external variables. Just take a look at the experience of India. Ten years ago, at the beginning of 1988, the exchange rate of US dollar was Rs 12.97. Today the same is Rs 43.55. Thus, rupee has depreciated by more than 300 per cent during the last ten years.

Other factors remaining unchanged the fall in rupeevalue should have helped Indian exports to increase by more than three times at least. Also there should have been a matching fall in imports. After adjusting impact on invisibles the end result should have been a decrease in India's current account deficit.The figures, however, tell a different story.

Current account deficit in 1987-88 was US$ 4.5 billion, at the end of 1997-98 it stood at an estimated US $6.2 billion. Despite a sharp slide in rupee value, the Indian external scene remained as gloomy as ever.

Why was it so? Two factors can be attributed for this: First, while India was busy adjusting its exchange parity other countries had not actually been just relaxing. They, too, were adjusting their exchange rates. In the world of competitive devaluations India ended up a loser.

Second, and perhaps a more important aspect overlooked while resorting to competitive devaluations, is the interplay of other economic factors. For instance, devaluation to be effective must go hand in hand with othereconomic policy measures which will turn production for export market more profitable than production for domestic market.

Only then resources would have shifted to the export market away from the domestic one. The same shift did not take place in India. The question is, Will a sharp fall in rupee exchange rate from the current level make such a shift possible?

Before attempting to answer, lets look at some thumb rules which govern exchange rates. Economists call this the theory of purchasing power parity (PPP). Put simply, this states that a basket of commodities will cost the same in two countries.

If say price of the basket is Rs 40 in India and US$2 in USA, the exchange rate should be Rs 20 for every US dollar. In the long run, market exchange rate tends towards the PPP rate. That is when rupee is stronger than Rs 20 per dollar (say Rs15) it has to fall and touch Rs 20.

In short, whether rupee should fall or rise against the dollar has to be determined by the PPP. For a quick back of the envelopecalculation of PPP use the Big Mac Index of the magazine Economist. Mac Donald's Big Mac burger maintains a certain uniform standard, whether it is prepared for hungry clients from USA, Indonesia or India. Its price, in local currency terms, therefore, offers a means of comparing exchange rates of two countries.

For example if a Big Mac costs US$ 2.63 in USA and DM 4.92 in Germany, PPP exchange rate works out to DM 1.87 per US dollar. The market exchange rate being around DM 1.77, this shows that in the exchange market DM is stronger by about 6 per cent than its PPP rate.

In India a Big Mac is priced at around Rs 60. Divising the price by its cost in USA, the PPP exchange rate of dollar in India should be Rs 22.81. In the rupee-dollar market instead, the exchange rate at present is Rs 43.10. If the argument that in the long run exchange rates move towards the PPP rate holds good, rupee should strengthen against the US dollar and not weaken further.

The market sentiment, however, isdifferent. Either PPPis not taken very seriously outside the text books of economics or there are many other factors inter acting in international market.

One reason why current-account deficits refuse to disappear in some economies is the movement of domestic prices, especially relative to the same in the competing economies. In India, for instance, domestic price index for all commodities in 1987-88 was 143. The same stood at 344 at the end of 1997-98.

A rise of 200 points in a matter of ten years an average 10 per cent rise every year. To neutralise the impact, rupee had to be depreciated by Rs 18.15 per dollar.

In other words, exchange rate of rupee against the US dollar should have been an inflation adjusted Rs 31.15. Instead, the current rate is Rs 43.10. Still we find Indian exports faring poorly in the international market. There is something more complicated than mere exchange rates which determines a country's export competitiveness.In the arguments above the factor ignored is the rate of price rise in USA.

Ifone takes the same into account, a 21 per cent rise in wholesale price index in USA during the period, to balance the comparative faster rate of price rise in India rupee had to depreciate to a level less than Rs 31.15 as estimated above.

In other words, the estimate has assumed zero rate of inflation in USA. When actual rate of price rise in USA is accounted for, it transpires that the inflation differential is not 139 per cent but 21 per cent less than that (127 per cent).

Rupee, therefore, needed to fall to Rs 29.44 not to Rs 31.15 as estimated above. One may, therefore, safely conclude that New Delhi has guided rupee lower than it was necessary to balance the higher rate of price rise in India than in USA.

Changes in nominal exchange rates do not have a lasting effect on external competitiveness of an economy. India, indeed, is a case in point. There are many others. Britain, for example, did not gain much from the fall in sterling during the last 20 years.

Japan did not find its massive tradesurplus wiped out in 1996 despite a steady rise in yen against the US dollar. USA did not enjoy a sharp fall in trade deficits despite a 60 per cent drop in dollar against DM and yen till 1996. Devaluation is no miracle cure. India should not worry about Chinese devaluation but set right its domestic policies for export growth.