Forex Devaluation

Devaluation

To revive the exports growth the reserve bank devalued rupee in July 1991 against major international currencies by about 20%.

Devaluation of a currency is expected to boost exports and curb imports. By devaluation the exports. At the same time imports into the country world become costly in terms of domestic currency. This world act as a disincentive to imports leading to a reduction in imports.

The expected results from devaluation will realize only when the exports of the country are price elastic. It is possible that exports from country may not increase in quantity terms because the demand for the products from the country depends also open many other factors like quality , etc. therefore , in there is no quantity increase in exports the result would be lesser realization in foreign exchange. On the import front, if the items imported are essential goods, there may not be any reduction in the quantity imported and the amount paid may increase instead of declining.

An analysis of the foreign statistics trade of India reveals that the expected benefits did not accrue in the immediate post-devaluation period. In dollar terms exports during April - November 1991 were lower by five per cent at USD 10,951

Million as against USD 11,531 millions during the corresponding period, the previous year. Imports too were lower showing a decline by 20.7% to USD 12,381 millions from USD 15,610 millions, but this was the combined effect of devaluation and curbs on imports. The deficit came down to USD 1,430 millions from USD 4,079 millions mainly due to lower level of imports.

The effect of devaluation was seen inflated figures of foreign trade in rupee terms. In rupee terms exports increased by 28.1% from Rs. 20,303 crores to Rs. 26,012 crores. The trade deficit too showed a drop to Rs. 3,398 crores from Rs. 7,181 crores. It may be noted that a surplus in foreign exchange terms is more important as it is the true indicator of accretion to foreign exchange assets of the country.

Along with devaluation, the other methods introduced were :( i) introduction of Exim scrips to replace replenishment licences. Theses licences are intended ultimately to replace the import licences entirely barring few exceptions ;( ii) abolition of cash compensatory support. Their impact on foreign trade balance has been only marginal.

The structural reform of the trade policy is continuing and the government

Has brought out a new export import policy on I st April 1992 valid for five years ending march 1997.along with this the rupee was made fully convertible on current account. the measures taken by the government were expected to yield results in the form of smaller deficit in balance of trade but as could be seen from the data given in the beginning, the trade deficit continues to cause concern. With stagnating exports the balance of trade increased from USD 11,359 million in 1995 -96 to USD 15.507 million by 1997-98. The general recession world over and the Asian currency crisis were the immediate excuses available to justify the poor performance on export front. The situation improved somewhat to a deficit of USD 13,246 in 1998-99. The improvement was not due to increase in exports , which in fact registered a negative growth. The fall in the world price of oil was the relieving factor. Though the trade deficit is on the declining trend since 1999-2000, the magnitude is still large.