Swaminathan S Anklesaria Aiyar has an interesting piece in Economic Times today where he questions the claims of job loss owing to the rupee appreciation that are being bandied about:
Hundreds of columns have been written on the exchange rate policy of the Reserve Bank of India, and its decision to let the rupee appreciate sharply this spring. However, what was earlier a debate mainly between technocrats has suddenly assumed populist, alarmist tones.
In Parliament, commerce minister Kamal Nath has said the appreciating rupee has hit labour-intensive exports such as textiles, leather goods and gems & jewellery, and that one to two million workers may have lost their jobs. Following up, industrialist and Rajya Sabha member Rahul Bajaj has written in this newspaper suggesting that 2.8 million people have lost their jobs.
The numbers are so huge that, if they were anywhere near the truth, we would have a major human tragedy on our hands. In fact, we have only tall stories and data inflation aimed at scaring people rather than informing them.
I toured Gujarat in the run-up to the state election, and talked to a wide range of people about the many issues that might determine the outcome. Not a single person mentioned worker distress in export industries as an election issue. Nor did I see this mentioned in the innumerable TV discussions of the Gujarat elections.
Now, at election time opposition parties are given to exaggerating rather than hiding distress issues. Narendra Modi was fighting principally on an economic development platform, and Congress speakers were looking desperately for flaws in his platform. Gujarat is a major centre for exporting both textiles and gems. If indeed workers were being thrown out of work by a strong rupee, this would have been a huge election issue. In fact, it was a non-issue.
I myself toured Ahmedabad and Saurashtra. I can state categorically that the garment and textile areas there were not hit by mass unemployment. Indeed, at least one textile magnate, Vinod Arora of Aarvee Denims, was positively gung-ho about the future of his industry.
I did not visit the diamond-cutting areas around Surat. But my Economic Times colleagues went there, and found no unemployment arising out of a strong rupee. They found signs of declining foreign orders, but this had not translated into fears of job losses among diamond cutters. The electoral impact was negligible. In which case the economic impact must be close to zero too. Proponents of a weak rupee are altogether more agitated than the people on whose behalf they claim to be agitating.
Now, ET correspondents have reported job losses running into thousands in Tiruppur. Clearly, there is some distress in some areas. But it is not an all-India calamity. There is a world of difference between losing a few thousand jobs and two million. Some job losses are inevitable, indeed desirable, in a market economy, and constitute transitional pains, not human disaster. Those who claim that a strong rupee is costing millions of jobs are talking through their hats. We need to shout this from the rooftops, since many media folk are falling for false propaganda on this score.
Indeed, the notion that modest changes in the exchange rate can produce such huge swings in employment is obviously false. If a modest rise in the rupee can kill two million jobs, a corresponding fall in the rupee should create a similar number of jobs. Alas, that did not happen when India had big currency declines in the past. Nor will it happen if the rupee now falls by 13%.
Export growth in April-September was 26.9% in dollar terms, and provisional data suggest 35.6% growth in October. Even allowing for rupee appreciation of 13%, this constitutes solid export growth. Exporters may be under somewhat more pressure than before, but are not throwing millions out of work.
A rupee appreciation is exactly like a reduction in all customs rates -- imported raw materials become cheaper and all tradeable finished goods become cheaper. I find it unsurprising that the advocates of autarky such as Rahul Bajaj, who fought for many years against lowering of customs duties, are similarly offended by rupee appreciation.
I would also encourage two kinds of skepticism about job loss in India. First, the massive unorganised sector - where there is no labour law and the market clears - acts as a stabilising force when employment in the organised sector fluctuates. Through this, India actually has substantial flexibility in the labour market, unlike the situation in industrial countries other than the US and the UK. Second, with an overall workforce of roughly 500 million, fluctuations of 1 million or roughly 0.2% are lost in the imprecision of most statistical systems. So even though the word `million' sounds like a lot, on an Indian scale, it isn't.
Swami also talks about the relative fluctuations of the rupee and the Chinese RMB. To help think about what's going on, here's a graph of the INR/CNY rate. Think of it like the usual INR/USD graph - bigger values are a rupee depreciation, and vice versa. The broad picture that I get is of a little movement since 2000, and a lack of a time trend. Which is hardly surprising, considering that both countries essentially peg to the USD.