Why is a weaker rupee good for the Indian economy?

rupee vs dollar

A weaker rupee is supposed to benefit net exporting sectors such as apparels and leather goods, which are also labour intensive, so it helps in job creation too. Therefore, it’s desirable.

However, the supporters of keeping rupee strong argue that a stronger rupee helps exports of automotive, electronics, pharmaceuticals and refined petroleum products which have significant import contents. Thus, a strong currency actually helps India's exports.

And they have a point. Despite a weakening rupee, the exports of items with low import-content, such as textiles, continue to struggle. This suggests that letting the rupee depreciate doesn't help net exporting sectors. Worse, it makes controlling inflation harder by raising the rupee cost of imported goods, crude oil in particular.

Nevertheless, this is flawed logic.

Logic of strength through a weaker currency

Electronics, pharmaceuticals, and oil sectors do have high "import content." So, while a weaker rupee raises the cost of imported electronic components, active pharmaceutical ingredients (API), and crude oil, it also incentivises exports of mobile phones, medicines, refined petroleum products and petrochemicals. Of course, the rupee cost of imported inputs rises, but exports bring in more rupees for every dollar earned, creating a natural hedge. Only industries that rely on imported inputs but don’t export, suffer from a weakening rupee.

That’s not all. In addition to incentivising exports, a weaker rupee also helps protect vulnerable Indian industries from dumped or subsidised imports from countries like China. Thus, it scores over import duties which are aimed at promoting indigenous manufacturing but would be difficult to defend, especially when President Donald Trump is threatening to impose reciprocal tariffs on countries with import barriers affecting American exports. Thus a weaker rupee simultaneously discourages unwanted imports while incentivising exports.

Why isn’t a weaker currency helping labour-intensive exports?

However, the question remains if indeed a weak currency truly benefits net exporting sectors, why apparel and leather goods exports are not doing well. The answer lies in structural issues—a weaker rupee can't fully offset the impact of multiple disadvantages with respect to import duties and trade policy. For instance, India’s apparel exports suffer not only from a stronger rupee but also from inverted duties i.e. higher import duties on textile fibres compared to those on apparels.

Similarly, Vietnam (being part of ASEAN trade block) benefits from its FTAs with China (which helps it in sourcing fabrics at lower costs), and the EU (that allows it to export clothing products at preferential import duties). In contrast, India has yet to conclude its long pending FTA negotiations with the EU but that penalises its textile exports.

A weaker rupee can't fully compensate for these disadvantages unless it is allowed to depreciate significantly—something the RBI has been preventing through interventions in the forex market, thereby making INR relatively stronger against USD vis-a-vis Euro, British pound or Japanese Yen.

It is not difficult to understand that if we keep the prices of basic chemicals, steel and textile fibres high by erecting all kinds of tariff and non-tariff barriers, then the export of value added products supplied by downstream industries will suffer.

Moreover, India must focus on boosting not just goods exports but also services exports and inward remittances, all of which benefit from a weaker rupee and help reduce the current account deficit. Besides, export is a 9-10 times larger sales opportunity than domestic sales: US$ 33 trillion versus US$ 3.5-4 trillion. As a result, India will grow at a slower rate unless its exports grow at faster rates.

Downside of the combined effect of tariffs, industrial subsidies and a strong rupee

Last but not least, generous PLI subsidies, high import barriers and stronger rupee are promoting "superficial" manufacturing and not "deep" manufacturing. Thus, to pocket 6 percent PLI subsidies and avoid import duties, mobile phone manufacturers have set up assembly plants. They import components, and export mobile phones (which are assembled in these so-called manufacturing units) and successfully avoid paying import duties, while pocketing PLI subsidies. As a result, “Made-in-India" mobile phones are largely assembled rather than truly “Manufactured-in-India”.

Given this backdrop, the RBI shouldn’t keep rupee artificially weak but it should allow market forces to determine its exchange rate, intervening only to prevent extreme volatility.

One key argument for a stronger rupee is that it helps contain inflation unlike a weaker rupee which raises the cost of imports like crude oil, fertilisers, and vegetable oils. While that’s not incorrect, high import barriers have a similar effect. In other words, a stronger rupee and high import tariffs (and non-tariff barriers) work against each other when it comes to controlling inflation. Likewise, diesel and petrol prices remain high even when crude oil prices drop sharply, primarily due to high excise duties and state VAT, not necessarily because of a weaker rupee.

It’s well known that fuel taxes were increased to bridge the revenue-expenditure gap caused by corporate tax cuts aimed at boosting private capex, which is yet to materialise. Meanwhile, the top guns of India Inc are holding back their capex plans, cutting jobs and underpaying employees - as pointed out by the country’s Chief Economic Advisor  - to protect their profit margins amid a weak demand.