The hidden opportunity

Last post elicited few good thoughts on the role of central bank in the appreciation of rupee. One of the readers asked two interesting questions and I am attempting to answer those to the best of my knowledge.

The first question was how to improve the state of exports when the home currency is appreciating. There always are two types of customers in the market, ones who look for the cheap goods and the others who look for the quality goods. If you want to sell your goods you either need to be competitive on either on price or on quality front. All the fuss around appreciating rupee is because Indian exporters are loosing ground on price front because of the costlier home currency. So the other option for Indian exporters, as rightly pointed out by one of columnist in Business Standard, is to improve on the quality of goods. I personally think that there is another reason why Indian exporters should concentrate on the quality. Cheapness is very easy to replicate but quality is not. To add to this, we have laws and acts to prevent replication of quality but not to prevent replication of cheapness. With the world becoming a global nation with countries as constituent states, India should expect a lot of competitors to the cheap goods and services it exports. So it is high time that Indian exporters should shift their attention from price factor to quality factor. But quality doesn’t come overnight. It needs sustained efforts and use of advanced technology and latest research to deliver quality products. We should take a look at the China’s toy industry, which is competitive in both quality and price.

But besides quality there are some other answers to this problem. The Indian industry can adopt innovative ways to reduce the cost of production. There is not one factor which contributes to the reduction in cost of production. Moving towards six-sigma, procuring raw material at low cost, reducing cost of transportation, understanding market dynamics are some factors to mention. All these factors demand importing advanced technology and research from the western world and appreciating home currency is going to make this import cheap. So the Indian manufacturers, who have for long cribbing about the high cost of importing advanced technology, should bank on this opportunity till the rupee is appreciating. This will help not only the export industry which in trouble but also the overall economy.

Government policy is another solution which is working in some of the countries with strong home currency. Most of the American and European countries, which have a strong currency, are competitive in export of some specific goods, though not all. Like USA is competitive in export of some agriculture products, European countries are competitive in export of liquor. Exporters in these countries can sell their produce at low costs because they are compensated by their governments in the form of subsidies, sops and tax breaks. They already have cost benefit when it comes to cost of production and transportation, which results in a large profit margin with lesser market price for their goods. It’s not feasible for government of India to provide subsidies and tax breaks to the tune of what the governments of western countries are providing. Hence Indian government with support from over hundred other nations is trying to get a bill passed with WTO (World Trade Organization) which mandates the developed nations to keep the subsidies and tax breaks in check. The talks are on for a while with no fruitful results as the developed nations are adamant with their demand. Even if the bill gets passed and developed nations remove subsidies and tax breaks from the specified sectors, are Indian exporters in the field of agriculture and liquor competitive enough in terms of quality to snatch the global market share of American and European exporters? The answer is a clear “no”. We are too far behind the western countries in terms of quality of goods and services.

Devaluing our currency is going to help the Indian export industry in the short run, but over a long period it’s the quality of your deliverables which helps you win the battle. The steep appreciation of rupee in the last few months has provided us that hidden opportunity when we can strive to achieve the quality and process to sustain that quality over a long time. Now it’s onto us where to make use of this opportunity or crib over the appreciating rupee. One thing is sure, appreciation of rupee may stall for some time but we must wait for a while before devaluation of rupee starts setting in.