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February 24, 1999


Rupee value seen as key to price-competitive exports

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The Economic Survey for 1998-99 has hinted at a correction in the exchange rate of rupee in the light of exchange rate developments in the competitor countries, specially southeast Asian countries.

"We would need to monitor closely the value of the rupee to ensure that our exports continue to be price competitive in the international market place," the survey said and added large-scale depreciation of several countries' currencies have affected exports of various commodities like man-made yarn, fabrics, made-ups, finished leather and processed minerals as Indian products have become less competitive.

The key priorities for macro-economic policy in the present environment will have to be control of fiscal deficit, careful monetary management, a pragmatic and flexible exchange rate policy, continued tight controls on short-term external indebtedness and accelerated reform and strengthening financial sector, the survey said.

Commenting on the financial crisis in east Asia, the survey said the crisis demonstrates that capital account liberalisation should be carefully calibrated to minimise the risk of disruption against the backdrop of new challenges and increased uncertainty.

The survey said the deepening financial crisis in east Asia has affected foreign investment flows to all emerging market economies. However, there was considerable potential for much higher direct foreign investment, provided India maintains a positive stance towards direct foreign investment.

The government has to accord highest priority to eliminating red tapism, which continues to be cited as the main complaint of potential foreign investors, the survey suggested with a call that policy impediments in the infrastructure sectors need to be ironed out on priority basis.

The survey pointed out that transaction costs emanating from implementatin of various rules and regulations pertaining to obtaining licences, customs clearances, refund of duties, infrastructural constraints, etc, have an adverse impact on export performance. There was a need to further simplify rules and regulations to smoothen export transactions, the survey said.

On the issue of India's commitments to the World Trade Organisation, the survey said no commitments have been made regarding market access, reduction of subsidies or tariffs under the agreement on agriculture. A presidential ordinance was promulgated in conformity with India's obligation under the TRIPS agreement.

The survey said infrastructure constraints, high transaction costs, SSI reservation, labour inflexibility, quality problems and quantitative ceiling on agriculture exports remain major factors affecting exports.

With the liberalisation of gold import policy, there was a marked shift in the new route of import of gold. It was estimated in the first six months of current financial year, about 90 per cent of gold import was under the new scheme while ten per cent under the baggage route as compared to 85 per cent the previous year.

The trade gap in the first nine months of the current financial year has increased sharply to $ 7.3 billion as compared to $ 4.5 billion the same period a year ago. The main commodities, which were responsbile for the slowdown in export growth in 1997-98, were cereals and raw cotton in agriculture sector, besides ores and minerals, crude and petroleum products.

Several measures to boost FDI have been announced in the current fiscal year, including allowing entry in infrastrcture and telecom sectors.

The survey also noted the easing of sanctions by the United States. Sanctions against India were imposed in May last following nuclear tests.

Reviewing the exchange rate developments, the survey said that the Indian rupee was depreciated by around 7.1 per cent from the March 1998 level till the end of January 1999. However, the RBI foreign currency assets rose from $ 26 billion at March 1998 to $ 27.4 billion.

Total foreign exchange reserves at the end of January amounted to $ 30.4 billion, which provides cover for about seven months of imports in 1998-99. The external debt at the end of September 1998 stood at $ 95.2 billion and the debt service payments improved further to 19.5 per cent in 1997-98 from 30.2 per cent in 1991-92.

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