NEW DELHI: India continues to be an attractive foreign direct investment (FDI) destination to foreign investors despite controversies over special economic zones (SEZs), a global investments expert here said.
Noting that the SEZ issue was a "political landmine" in India, Courtney Fingar, editor of Financial Times' global investments magazine fDi, said SEZ investment is a "double- edge sword" that could be a mode of development at some places but not everywhere.
"It may be too early to say what it will do for India, but apart from anything else, the creation of such zones do send a signal to the global business community about the country's keenness for FDI," Fingar said.
He was here to felicitate Commerce and Industry Minister Kamal Nath who was selected for the "fDi Personality of the Year" award among other business and political leaders from Latin America, Africa, Middle East, Europe and North America.
JVDheldden, the Indian arm of fDi, also released a study called "India as FDI Destination" which said despite huge FDI interests, the country is not realising its full potential because of the business environment and policy- related impediments.
Noting that GDP growth accelerated at 9.4 per cent during the last fiscal, JVDheldden director Suren Uppal said a significant increase in investment levels will be required for a sustainable growth of 8 per cent.
The promise of 500 million dollar-plus investment opportunities in diverse sectors in India was marred by the obstacles at various levels, he said.
Friday, August 31, 2007
SEZ agitations have little impact on India's FDI zeal
India, Bangladesh to sign MoU to boost exports
DHAKA: Bangladesh will sign a memorandum of understanding (MoU) with India for duty-free export of eight million pieces of readymade garments.
The offer had been made during the 14th summit of the South Asian Association for Regional Cooperation (SAARC) in New Delhi and was firmed up during a subsequent visit of External Affairs Minister Pranab Mukherjee to Dhaka.
Chaired by Bangladesh Chief Adviser Fakhruddin Ahmed, a meeting of the Council of Advisers on Tuesday approved the MoU proposal for duty-free import by the Indian government.
The move comes amidst a steep fall in Bangladesh's readymade garments' exports.
The manufacture has been hit by labour unrest due to bad working conditions and failure to revise wages, while the exports were hit by political turmoil in the second half of 2006.
Growth in the readymade garment industry, the powerhouse of the country's export economy, has slowed with the sector for the first time failing to reach export targets and facing a sharp decline in new orders, the newspaper said.
"Yes, we passed a rare disappointing year," said Anwar-Ul-Alam Chowdhury, president of Bangladesh Garment Manufacturers and Exporters Association.
Chowdhury blamed the slowdown on a weakened US economy and the unprecedented rioting at garment industries in and around Dhaka for eight weeks when nearly 400 factories were damaged and the Dhaka Export Processing Zone was shut down twice.
Exporters don`t buy govt claim on target
Contrary to expectations of a slowdown in export growth due to rupee appreciation, the commerce ministry today said India would meet the $160-billion export target for 2007-08.
Exports in 2006-07 stood at $125 billion, which prompted Commerce Minister Kamal Nath to announce an ambitious target for this year.
However, in recent months, the rupee has appreciated to 40-41 to a dollar, giving rise to fears the target may not be met.
“We are confident of meeting the export target of $160 billion for 2007-08 if the rupee remains at 40-41 to a dollar. Going by current indications, we do not see any reason to revise the target,” Commerce Secretary GK Pillai said on the sidelines of a CII conference here.
Pillai’s remarks come even as the Prime Minister’s Economic Advisory Council recently said the 2007-08 exports would be around $147 billion due to the appreciating rupee, a growth of 18 per cent over 2006-07.
However, Indian exporters are pessimistic about reaching even the $140-billion mark.
“In the coming months, the growth will be in the range of 7-8 per cent only. We will not be able to cross even the $140-billion mark,” said Ganesh Kumar Gupta, president of the Federation of Indian Exporters Organisation, the apex body of Indian exporters.
A large number of Indian exporters have had to increase the prices of their products by up to 12 per cent.
Business Standard had found that exporters across the country were yet to get new orders as buying from countries like China was a cheaper alternative.
A recent government survey also painted a gloomy picture and predicted that a large number of jobs could be lost in export-oriented industries.
Business Standard recently visited export clusters like Jalandhar (sports goods), Agra (footwear), Moradabad (brassware) and Bhadohi-Mirzapur (carpets) and found that exporters, hit hard by the rise of the rupee, were either turning down orders or shipping consignments for a loss.
On its part, the commerce ministry expects that by 2012-13, exports will touch $300 billion and imports $400 billion, on the back of the continuing strong growth in the manufacturing sector, especially in special economic zones.
Pillai said in July, merchandise exports grew 16 per cent in dollar terms. “We will talk to various export promotion councils on ways to increase exports,” he said.
However, he ruled out any additional relief measures for exporters in the near future. Growth in merchandise exports in June was 14.05 per cent while the May growth was 18.07 per cent. In April, growth in merchandise exports stood at 23.06 per cent.
Pillai said the procedures related to export and import would be automated by the end of 2008. This, he added, was likely to reduce the transaction costs by up to 3 per cent.
“The cabinet secretary is chairing a meeting of various ministries today to take stock of the situation. When the system is up, exporters will be able to use the Internet to complete all procedures associated with imports and exports.”
THE STORY SO FAR
April 2007: Commerce Minister Kamal Nath sets an export target of $160 billion for 2007-08
July 2007: The Prime Minister's Economic Advisory Council says exports during the year will be around $147 billion
August 28, 2007: Commerce Secretary G K Pillai says $160 billion target will be achieved
# Federation of Indian Exporters' Organisation says exports to be $140 billion
INDIA’S IMPORT DUTY EXEMPTION: CURSE OR BLESSING?
(This article was published in Israel): The Indian diamond industry is, in a strange way, enjoying a period of exceptional goodwill in the highest echelons of governance. There is a tremendous behind-the-scenes willingness to assist the industry in the development of relations with African producer countries and Russia. But the government is forthcoming at home. Just look at the Indian government’s agreement to impose a “presumptive tax system” (i.e. an agreed profit level on turnover, which is comparable to the tax systems enjoyed by the industry in Israel and Belgium) and the removal of all import taxes on polished diamonds.
What may not be sufficiently appreciated is that it takes two to tango. If the industry doesn’t do its part, the current goodwill may quickly evaporate. Not everybody in India’s government is enthusiastic about assisting the diamond industry and meeting its requests. Import duties, which have been removed, for example, can also be reinstated. Actually, manufacturers in India had severely protested the removal of these duties (fearing competition with China), and any pretext for pleading for the reimposition of the tax may well be welcomed.
The enormous success of the Indian industry is partly, maybe largely, a result of good cooperation throughout the years. The recent removal of import duties on polished diamonds was an additional step meant to make India a more attractive trading center, to enable foreign buyers to find all their polished requirements in Mumbai.
Sadly, as is often the case, one needs only a handful or so of unscrupulous profiteers to ruin a good thing for everybody. That may be the case now regarding the import duties.
The duties on polished imports were dropped from five percent to zero in May 2007. Because of the sky-rocketing activities in the four-month period preceding and following the announcement, Indian traders imported $1.41 billion worth of polished, mostly into Surat. As the system needed a “warming up,” the activity developed in earnest in July, when polished diamond imports reached nearly $0.5 billion. ($482 million, to be precise.)
These imports largely represent a “circular” trade (in-out, in-out), mostly with Dubai. One might argue that this is nothing new. But hitherto “circular” trade involved combined rough and polished transactions, balancing rough imports with (overstated) polished exports, etc. What is different now is that the free imports of polished have made it much easier to achieve greater exports and, consequently, more access to cheaper financing.
Needless to say that these newly developed manipulations are also reflected in India’s diamond export figures: in these four months (April-July), India’s polished exports soared to 12.9 million carats worth $4.07 billion – a 25 percent increase over the comparable period last year. The polished manipulations were clearly evident in July, when total polished diamond exports registered a growth of 50 percent over the same months last year!
The Nature of the Circular Trade
In all fairness, part of the polished imports is quite legitimate. The zero duty enabled many Indian diamantaires to bring home some of their own stocks held in overseas inventories, especially appealing to do when there is an active and attractive local market for the goods.
Surat is the preferred location for imports. In the Mumbai trading hub, there is a two percent tax (octroi) on all imports from other Indian states if the diamonds are sold for consumption within Mumbai limits. A tax exemption is possible when a guarantee of re-export is given.
It is therefore prudent tax planning that many of the imports go to affiliates in Surat, where there is no such a tax.
As in the last fiscal year – when there was still a five percent duty in effect – monthly polished imports averaged $158 million (about the equivalent of 32 percent of July’s imports). It is probably fair to say that about a third of the current imports represent ordinary business serving the domestic trade. Allowing also for natural trade growth and inventory returns, one might conjecture that the “unusual” “circular” trade only applies – so far – to about half of the activity.
How does the “circular” trade operate and what is its purpose to begin with? Certain individuals, or agents,(not necessarily from the diamond business) will import polished diamonds from Dubai for a service fee on behalf of third parties. These fees are as low as 0.1 percent, but, of course, these commissions “add up” to nice income. These agents may themselves pay for these imports at the official exchange rate and then sell the dollar proceeds off on the local black currency market. The differences can be substantial. It’s easy profit.
However, there is a variation on the scheme that is far more prevalent: The agent imports the polished into Surat on behalf of a third party (again, for a service fee) and then sells these goods officially (i.e. invoiced) to that very same party, which will then officially export these goods (to Dubai) and enjoy subsidized (concessionary) export financing.
These funds are put to work in the domestic informal non-bank financing sectors. When the margins on the proper diamond business are minimal or non-existing, it is tempting to earn good money on the grey financial markets. Moreover, a few months down the road, when the export proceeds are officially remitted, there is an added bonus of earning rupees because of the continued appreciation of the exchange rate.
Officials of the Gem and Jewellery Export Council are Concerned
These are very sensitive issues and it is hard to get either official information or comments about them. However, after talking with some members of the board of directors of India’s Gem and Jewellery Export Promotion Council, I am aware that they are privately distraught about these practices and, frankly, they also find it hard to “quantify” the volumes involved.
From the Council’s perspective, everything is proper and legal. All imports are official, the shipments take place through the established courier services, and all subsequent re-exports are also official. Even if the Council may not like some practices, it probably isn’t allowed or capable to intervene.
Of the various leading local manufacturers and exporters with whom I have talked, some confirmed that they “have been approached” by operators suggesting their participation in the “circular” scheme, mainly to get an advantage of exchange rate differentials. One sophisticated trader said, “Chaim, there are some aspects of these transactions I frankly don’t understand. Playing safe is staying away from it all.”
A major player points his finger to the Indian banks. Their eagerness to finance “circular” export trade deals is seen as a disgrace. Bank financing sources aren’t infinite – and proper exporters need to compete with “less proper” exporters for the available borrowed resources.
The irony is that the forthcoming government support in the form of “presumptive taxes” may make it less attractive – or even undesirable – to artificially increase one’s exports.
In a vast industry that employs close to a million people, there will always be some “deviants” whose understanding of “two to tango” is limited to “dirty dancing.” They should be made known that they dance out of sync with the great majority. By taking quick action, the Indian diamond industry might rid itself from the new circular menace before real damage is inflicted.
Textile exports may take a hit this quarter
There are concerns over the performance of textile exports in the current quarter on account of rupee appreciation, said a senior Textile Ministry official on Thursday. “While the first quarter performance was not badly hit…some segments were badly affected while other segments did well…we are worried about the current quarter performance,” he said.
On asked whether the sector would be able to achieve the export target of $25 billion set for the current fiscal, the official said, “We are trying are best.”
While speaking at a curtain raiser for the two-day TEX Summit 2007, to be organised in the Capital from Friday, the Minister for Textiles, Mr Shankarsinh Vaghela, said, “The issue of duty draw back for small textile players and other issues will be discussed in the summit.”
The sector is faced with faced with high transaction cost, lack of power and need for labour reforms. The summit will try to look into all these aspects with the participation of bureaucrats, industry representatives and other intelligentsia.
The Commerce and Industry Minister, Mr Kamal Nath, is scheduled to inaugurate the event.
India-Asean FTA final details to be worked out by negotiation panel
The final details on the India-Asean FTA will be hammered out by the Trade Negotiation Committee (TNC) before September 2007 so as to draw a broad framework for the launch of the free trade agreement early next year.
This would also enable the heads of Government of India and Asean when they meet in Singapore in November to give a political endorsement to the whole plan and iron out last-mile differences, if any.
Speaking to Business Line, Commerce Secretary Mr Gopal K. Pillai, who returned after taking part in the senior official-level meeting in Manila on August 25, said that on special products such as crude palm oil, refined palm oil, te a, coffee and pepper, India has reiterated its stance that it would not reduce tariffs any further.
Even as New Delhi has said that it would be reducing tariff from 100 per cent to 50 per cent over the years 2012 to 2022, Vietnam has argued that such slower pace of tariff reduction on tea, coffee and pepper would block 29 per cent of its trade with India.
On the other hand, Mr Pillai said, Vietnam has put 450 items in the highly sensitive track (HST), which also blocks 29 per cent of India’s trade with Vietnam.
“If we are giving 50 per cent duty cuts on the five special products, will Vietnam give similar cuts on so many items in its HST?”
Mr Pillai also said that Vietnam, while agreeing in principle, ahs promised to work out details and revert.
Barring the special products, negotiations on minor issues such as tariff lines under negative list, five-year standstill and special and differential treatment for Cambodia, Laos, Myanmar and Vietnam would be thrashed out as the deadline for reaching the agreement is September 30.
The FTA is already behind schedule by two years.
For some countries with already lower tariffs such as Malaysia, the pain of duty concession is less as compared to India, Mr Pillai said.
“When you enter into an FTA on the goods part, you have to face this but we will get it back when the services negotiations come, as we gain more in that area.”
On India’s liberal offer till date in any of its negotiations to Asean with no matching accommodation from the other sides, Mr Pillai said that there is a distinct geopolitical gain in forging an FTA with Asean.
“If you are not there, there are FTAs between Asean and China, Japan and Korea. These countries would trade on zero duty and take away the market and what we are exporting to Asean would come down further.
Wednesday, August 22, 2007
New definition of Basmati Rice may harm Indian Export Market
If the category is expanded, other countries can claim that their long-grained rice too makes the cut.
India’s agriculture ministry plans to expand the definition of basmati to include more varieties of aromatic long-grained rice in an effort
to facilitate the development of new varieties of the cereal that has a huge export market.
However, doing so could leave the door open for aromatic long-grained rice varieties developed in other countries to be classified as
basmati, says the commerce ministry. And that would hurt India’s trade prospects.
Basmati is a fragrant rice variety that is traditionally grown in the Himalayan foothills in India and Pakistan.
The agriculture ministry is pushing for the redefinition on the basis of a recommendation from the Indian Agriculture Research
Institute. The commerce ministry has to notify the new definition for it to be accepted.
"The new definition will not only include new evolved varieties but will not affect trade value of basmati. We are looking to keep trade
intact while keeping scientific research in new varieties alive,"says a government official close to the development who did not wish to
be identified.
"Basmati should be limited to traditional and evolved varieties as it is under the current definition,"says another government official
familiar with the matter. This official, too, did not wish to be identified.
The present definition allows only pure lines of basmati (traditional) and the next generation, with at least one pure line as a parent, to
be dubbed basmati.
Traders, the people most likely to be affected by the new definition should it be notified, say redefining basmati would effectively end
India and Pakistan’s monopoly over the rice variety. "The definition came after six years of debate, longer than we took for our
Constitution. The US threat was the wake-up call but basmati has been threatened (by varieties) from all parts of the world,"says R.S.
Seshadri, director, Tilda Riceland Pvt. Ltd, an Indian exporter of basmati.
In 1997, an American company, Rice Tec Inc., tried to patent "Texmati"at the UK Trademark Registry. This triggered a trade spat with
India. During the dispute, Indian lawyers established that the name "Texmati"reminded consumers of basmati, which was grown in
India.
Realizing that the threat fr-om long-grain rice grown els-ewhere was genuine, the government drafted the first definition of basmati in
2003 to protect its identity. However, if the government now redefines ba-smati in a broader way, its cla-im that long-grained aromatic
rice grown elsewhere cannot be called basmati may weaken.
"Broadening (the definition) must a carefully thought out exercise. We must look at the long-term implications. The line between
generic and exclusive in the case of basmati is a thin one. We have strived hard to prevent basmati from becoming a generic
term,"says Seshadri. "Broadening the definition will bring in scores of new varieties (that can be called basmati) and reduce the
premium,"he adds.
If basmati were to become a generic term, Indian rice exporters stand to lose out to exporters from other countries who can brand
their long-grained aromatic rice basmati if it meets the definition set by the government.
"Basmati was seriously thre-atened as the name was in the danger of becoming generic... The step to define basmati was taken to
protect it,"says a lawyer familiar with the matter who did not wish to be named.
As first reported by Mint on 15 August, the agriculture ministry wants to redefine basmati. It wishes to make the definition broader and
more generics because scientists have be-en unable to develop new varieties of the rice that meet the current definition. New varieties
are usually created to incr-ease yields or fight pests.
"Nobody is stopping research,"says Karan Chanana, managing director of rice exporter Amira Foods India Ltd, who adds that the
agriculture ministry can achieve its objective by simply defining a new rice variety. "Right now, we don’t need to redefine basmati. We
need a new segment in rice for aromatic, long-grained rice. Right now, all rice is either basmati or non-basmati.”
The issue of definitions will cease to be as important if India manages to obtain a Geographical Indication (GI) for basmati. If the
country manages to acquire this, only long-grained aromatic rice grown in certain parts of the country (and Pakistan) can be called
basmati. India and Pakistan plan to pitch for a joint GI, although this could be operationally difficult to implement and monitor.
However, Seshadri says that a GI may not solve the problem, but only compound it. "We have some critical differences to other
GIs,"he says. "All the rice that is grown in the area is not basmati unlike other GI products.”
Tuesday, August 14, 2007
India-China trade imbalance growing
Beijing, (PTI): Despite the India-China bilateral trade growing at nearly 50 per cent this year, the surging trade deficit is all set to top the record figure of USD 4.11 billion in 2006.The growing trade imbalance in India-China bilateral trade has caused concern among Indian officials who are highlighting the need for the Indian industry to diversify the country's trade basket with the Communist trading giant, whose total foreign trade has touched a record USD 1.17 trillion, up 24.4 per cent, in the first seven months of 2007.
India-China bilateral trade in January-June zoomed to USD 17.20 billion, achieving an impressive growth of 47.97 per cent over the same period last year, latest Chinese customs figures said.
If the current momentum of USD two billion of bilateral trade per month continues, the targeted trade figure of 20 billion US dollars by 2008 will be achieved a year earlier than expected.
Indian exports to China touched USD 6.9 billion during January-June, up 29.29 per cent over the corresponding period in 2006.
At the same time, Chinese exports to India soared by an impressive 64.07 per cent to touch USD 10.24 billion during the first six months of the year compared to the same period in 2006.
India suffered a trade deficit of USD 3.34 billion during the first six months, compared to USD 1.09 billion in the first quarter of 2007, signalling that the deficit is set to reach a new record in 2007.
In 2006, India's trade deficit with China amounted to a record USD 4.11 billion compared to USD 843 million of trade surplus the country enjoyed in 2005.
"We are greatly heartened by the positive momentum in our bilateral trade. Yet, both countries need to examine its various parameters closely, particularly the narrow composition of the trade basket and the insufficient use of each other's comparative advantages," sources told PTI here.
"For sustainable high volumes of bilateral trade, diversification of the trade basket is not only important but imperative," they said.
During his visit to China in April this year, Commerce and Industry Minister Kamal Nath had raised the issue of the growing trade imbalance with his Chinese counterpart, Bo Xilai.
India-China trade ties have witnessed a qualitative change in recent years and it has the potential of growing even faster. "For this we need to work on diversifying the India-China trade basket and facilitating greater interaction and information flow between the commercial sectors of both our countries," industry sources said.
In 1995, India-China trade was just over USD one billion. Less than a decade later in 2004 trade crossed the USD 10 billion mark to record 13.6 billion. In 2005, bilateral trade stood at USD 18.7 billion and in 2006, it touched USD 25.05 billion, registering a growth of 33.87 per cent.
Sources say there are several areas, including the fields of agriculture, dairy industry, food processing, auto-components, pharmaceuticals, health care, machine tools and Information Technology, where the two countries could benefit from expansion and diversification.
India is currently exporting iron ore, cotton and other raw material, IT-related products and services to China, while China is mainly exporting finished industrial products to India.
Meanwhile, China's foreign trade reached USD 1.17 trillion, up 24.4 per cent during January-July, according to Chinese customs statistics.
The European Union remained its largest partner with a trade volume of USD 190.1 billion, a growth of 28.5 per cent over the same period of last year, followed by the United States with USD 167 billion, up 17.5 per cent, and Japan with USD 130 billion, up 15.2 per cent.
The total trade volume included USD 654.4 billion in export, up 28.6 per cent, and USD 517.6 billion in import, up 19.5 per cent. The trade surplus was USD 136.8 billion, or 77 per cent of the figure for the whole of last year.
Foreign buyers scared of visiting Pakistan: APTA
LAHORE: Foreign buyers are reluctant to visit Pakistan due to the law and order situation in the country and the export target of $19.2 billion, with the current cost of doing business, will not be possible to achieve, observed the All Pakistan Textile Association (APTA) members in a meeting held on Monday.
According to APTA Chairman Adil Mehmood, exporters have to travel to Dubai, Hong Kong, UK and other countries to meet importers/buyers. He said that in the meeting all the chairmen of committees refuted the government policies and declared it anti-export and anti-employment.
“Our exports will increase only if the government of Pakistan gives matching incentives as given by India, China and Bangladesh regarding utility charges, mark-up, transport, packing material,” he said adding that raw material particularly cotton scenario is very alarming as the current year’s new crop of cotton is being sold at Rs 3500 per maund against last year’s price of Rs 2300 per maund, giving a big blow to spinning industry.
He said that because of this reason, raw cotton will be exported giving all the benefits of textile trade to China, India, Bangladesh and Sri Lanka.
He claimed that the government totally ignored the textile spinning industry while announcing incentives to the rest of the sector and has given R&D rebate to other sectors of textiles, whereas maximum employment and revenues are paid by the spinning sector. “It is very clear that if spinning shuts down, all down-stream textile industries will also be affected,” Mr Mehmood said.
Economic advisors of the government are not taking it seriously whereas the business community is taking it as writing-on-the wall. He said that the government must realise that what could happen if spinning sector shuts down even partially by 50 to 60 percent. He said that in such situation, the millers would have to import yarn worth millions of dollars to run the value-added sector in addition to unemployment of 500,000 workers, huge bank defaults and massive decrease in tax/revenue collections.
“Under the given circumstances, one can easily think about the export target, GDP growth rate, budgetary deficit, poverty elevation, developmental funds, education, health etc.,” he said.
Thursday, August 9, 2007
Stronger rupee: End of India's export boom?
Since March, the rupee has risen sharply, by roughly 9 per cent against the US dollar, to a nine-year high. The rise has also been significant in what economists call "real effective" terms, meaning appreciation that is adjusted based on inflation, and measured against the currencies of a range of India's trading partners. This trend has brought a chorus of concerns that the strong rupee is eroding India's competitiveness, and that it represents a threat to the country's buoyant export growth. These concerns are overstated.
All else being equal, exchange rate appreciation will, of course, make India's exports more expensive, and hence less competitive. But all else is not always equal. For starters, the rupee's appreciation has lagged behind the regional trend. For example, between July 2005 - when the Chinese renminbi was revalued - and December 2006, most regional currencies appreciated by about 10 to 20 per cent in real effective terms. At the same time, the rupee actually depreciated by about 4 per cent.
Moreover, the exchange rate is only one of many factors that determine an economy's ability to compete. Since India is becoming more competitive along other fronts - for example by boosting productivity and improving business conditions- export growth can remain buoyant despite a stronger rupee.
Finally, and equally important there are benefits to a strong rupee. Corporations benefit from cheaper imported inputs, and households benefit from increased buying power.
In any case, a weaker rupee would provide no guarantee that exports would grow faster. India's experience during the 1970s and 1980 makes this clear. Even though the rupee lost more than half its value in real terms against the US dollar, exports grew slowly, and India's share in world trade fell by a third.
A survey of Asia illustrates how strong export performance can go hand-in-hand with a strengthening currency. In Korea, for instance, export growth averaged 20 per cent per year between 2003 and 2006 - even as the won appreciated about 23 per cent in real effective terms.
Exports in Indonesia and Thailand have also grown rapidly despite stronger currencies. Even India's 30 per cent export growth - the fastest export growth in 33 years - was achieved in 2005, when the rupee appreciated by over 4 per cent.
Rapid productivity growth plays an especially important role in explaining why a country's export performance can remain robust even when its currency strengthens. Again, the experience of the fastest-growing Asian economies is instructive.
In Korea, industrial productivity growth averaged over 6 per cent between 1972 and 2004. This was significantly higher than in the United States and Japan, where industrial productivity grew by a mere 2 per cent and 2%, respectively, during the same period.
In India, strong productivity growth, robust corporate profits, and corporate pricing power augur well for continued competitiveness in the medium term. Over the last 15 years, total factor productivity growth - the productivity of capital and labour taken together - has averaged about 2 per cent per year, more than double that in the US for the same period.
With total factor productivity growth expected to rise to 2% in the coming years, India should continue to gain competitiveness. In addition, service exporters may have some scope to raise prices, especially in industries that focus on customer-specific services. Finally, the high profitability of India's corporate sector should buffer the costs of rupee appreciation.
Where does this leave monetary policy? The Reserve Bank of India [Get Quote] remains under pressure to resist the strengthening of the rupee by buying foreign currency. But the liquidity that such intervention would create could stoke inflation.
And to mop up the impact of this liquidity, the Reserve Bank of India would have to issue bonds, possibly at higher interest rates. This could encourage further capital inflows and further appreciation pressure.
Moreover, given the productivity-driven momentum of the rupee's appreciation, intervention is unlikely to be successful in the long run, since financial markets expect the rupee to appreciate eventually.
The best policy response would be to push ahead with reforms to boost competitiveness. The list is well-known. It includes investing to address the very serious problems in infrastructure, which cost an estimated 1 per cent per year in foregone growth.
It also includes reducing import duties on capital goods to stimulate investment. Other possible measures include making labour markets more flexible to encourage job growth and a more efficient allocation of workers, and scrapping small-scale reservations to promote competition and innovation.
Reforms in education are also vital to address the critical shortage of skilled labour. Finally, continuing to rein in fiscal deficits will make room to fund infrastructure investment. Implementing these measures on an aggressive footing will give India the best chance of realising its full export potential, and it will make currency appreciation less worrisome.
-Kalpana Kochhar & Andrea Richter Hume. [Kalpana Kochhar is the International Monetary Fund's mission chief for India, and Andrea Richter Hume is a senior economist on the Fund's India team]