Normally speaking, devaluation (or depreciation) of a currency is expected to strengthen its current account balance, provided traded items have favourable demand and supply elasticity’s and devaluation is accompanied by relevant export promotion measures.
Observers feel that exchange rate depreciation of rupee was not provided the necessary support of export promotion and other follow up measures till the switching over to the era of liberalisation and globalisation in 1990s.
During the era of fixed exchange rates, the first devaluation of the rupee took place on 1 September, 1949 and the second one on 6 June, 1966. In both cases, there were hardly any effective follow up measures and our exports did not respond much to these devaluations.
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When leading currencies of the world were ‘floated’, we adopted a policy of the ‘moving peg’. However, progressive exchange rate depreciation could make its impact felt only with the growth of our economy and its deepening contacts with rest of the world.
The force of this impact increased when we accelerated the pace of economic reforms and opened up our economy to the world both as a matter of considered policy shift and under WTO pressure.
According to the official assessment of the developments, since early 1990s, rupee depreciated in both nominal and real terms. And, this was supplemented by various export promotion measures by the government.
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These factors led to the strengthening of exports of major commodities like gems and jewellery, textiles, engineering odds, chemicals and related products, and ores and minerals.
The inference is that for further strengthening of our external sector and for improving our international competitive strength, we should intensify our domestic economic reforms, especially those which remove various impediments to export growth. Such reforms should be accompanied by further tariff reforms for strengthening the country’s global competitiveness.