Detecting anything even remotely cuddly about the Beast of Bentonville (as Wal-Mart is known to its critics) is foolhardy at the calmest of times. But if something about this supermarket chain qualifies as cute, it’s the old Wal-Mart ‘belly wiggle’, that “W-A-L—M-A-R-T” chant of its staff cheerleaders, hyphenated by a hoopla-like whirl of the waist as they sp/yell it out. It reminds me of school. It also reminds me of elementary economics. And of India’s lousy trade elasticity.
The country’s imports and exports are still largely ‘inelastic’: the quantities in demand are mostly insensitive to changes in price. Crude oil constitutes the bulk of Indian imports. Fuel is ‘essential’ no matter what the landed cost, and subsidies offset whatever little cutbacks in usage a price spike could otherwise have ordained. Gold forms another chunk of imports, and since this yieldless metal is—fallaciously—seen as an asset, obscene prices don’t always deter buyers. Indian exports, meanwhile, don’t seem too responsive to cost variations either. In theory, a weak rupee cheapens domestic output (in dollar terms) and thus ought to boost exports. But software deals, based on contracts, tend not to soar or suffer on account of a yo-yo-ing exchange rate, and for some peculiar reason Indian merchandise doesn’t really seem to gain or lose much global marketshare either way.
Consider the year past. On 1 August 2011, the rupee was ruling in a comfort zone of 44 to the dollar. This was just before it crumpled. By the end of the year, it had lost almost a fifth of its value. How did Indian exports do? They slumped. Okay, maybe a cheap rupee works with a lag, but even though it recovered a bit and then crashed to a low of 57-plus to the dollar in mid-2012—before last month’s revival—India’s exports have stayed stupendously stagnant. Imports have slowed too (oil as well), but by less, and only in the past quarter or so. Both appear to depend on the economy’s spunk more than the rupee.
Inelasticity makes it devilishly difficult for India to balance its trade. It also warps the RBI’s rupee policy. While the RBI’s stated aim right now is to contain currency volatility (rather than nudge it up or down to a pre-set ‘peg’), inelasticity makes a compelling case for strategic control of the currency, even at the risk of its interest rate policy going a bit awry (as a result of all the rupees it would need to buy and sell in the open market). And it will get no easier… unless Wal-Mart and its ilk begin to import (and export) price-sensitive products in volumes vast enough to lend India some extra elasticity. If that happens, things might actually work the way textbooks expect.