11 - The impact of devaluation

Summary

It is generally accepted that, besides the pressure from abroad, there were two basic policy objectives underlying the devaluation of the rupee in June 1966. In the first place, it sought to replace the administratively cumbersome structure of import restrictions and export subsidies by a straightforward exchange rate depreciation. At the same time, it aimed at improving the balance of payments position. In view of the first objective, it is hardly surprising that the devaluation was accompanied by an elimination of the prevalent export incentives and import controls, as a result of which, the effective devaluation was much less than that suggested by the apparent change in parity of the rupee. All the same, the devaluation was, at least partially, intended to stimulate exports, and it is important to examine whether or not it actually did.

This chapter attempts to analyse the impact of the Indian devaluation in 1966 on export performance in the subsequent years. The first section estimates the net devaluation as distinct from the apparent depreciation in the exchange value of the rupee. The section following that, examines the influence of certain exogenous factors, such as the two successive droughts, which coincided with the devaluation decision. Having thus determined the extent to which other changes in the economy interacted with the devaluation of the rupee, we shall then consider its effect on Indian exports during the period 1966 to 1970.