Economic Highlights
New Delhi, 23 August 2013
Rupee’s Free Fall
SOME SMILE, OTHERS FROWN
By Shivaji Sarkar
The rupee is on a free fall. It’s a
blessing for some companies and bane for others--those under foreign debt. Besides,
it’s beneficial for the NRIs, who have started repatriating huge sums as it
only multiplies in India.
But, there is the other side-- it makes overall lifestyle expensive. Even the
innocuous soap prices have been rising. Both family budget and industry input
cost are affected. According to Centre for Monitoring Indian Economy (CMIE),
the power industry alone saw an increase of over 10 per cent (from 15 per cent
to 26 per cent) last year in its fuel bills owing to the rupee slide.
Lower the price of rupee against the
dollar some companies spruce up their profits. The biggest gainers are the IT, pharmaceutical,
auto and FMCG companies. Those which are to make huge profits in rupee terms
include ITC, Infosys, Wipro, TCS, Tech Mahindra, Dr Reddy’s Lab, Cipla, Sun
Pharma, Tata Motors, Mahindra &Mahindra, Bajaj Auto and to some extent
public sector BHEL. The companies are likely to gain as their earnings in
dollar terms are more than their expenses.
However, auto firms may only have moderate
gains as their expenses for administrative and servicing set ups are high, whereas
Infosys, Wipro and TCS are likely to be huge gainers, as their administrative
expenses are mostly in India.
Whatever they earn abroad through project work or selling services they earn
huge margins in dollar terms. An estimate is that TCS would be the biggest
gainer with over Rs 5700 crore additional profit. Infosys is expected have
additional gain of Rs 3600 crore and Wipro Rs 2700 crore.
In a study of 1298 companies, the
National Institute of Public Finance and Planning (NIPFP) found that many made
a killing because of the falling rupee. At the same time, there are many more
companies which would see larger outgo in rupee terms. These have large
external commercial borrowings and as their debt servicing cost increases,
profits are likely to get depressed. This apart, new ECBs for Indian companies
may be more expensive as the lending agencies are likely to increase interest
rates. They might take the plea of an economy that is almost having negative
international credit agency ratings.
In rupee terms, eight big companies
are estimated to have ECB of approximately about Rs 5.6 lakh crore. Among these
Reliance ADAG has ECB of Rs 1.13 lakh crore, Vedanta group Rs 99,600 crore,
Essar group Rs 98,400 crore, Adanis Rs 81,100 crore, GMR Rs 40,8000 crore, Leko
Rs 39000 crore and GVK Rs 25,000 crore. The list includes scores others, but it
does not include their debt servicing cost. This means that India has to
prepare for huge dollar outgo and companies would have to shell out huge amount
in terms of the rupee. It is likely to cut into their profits and that would ultimately
result in less payment of taxes to the Government, which might lead to its fiscal
deficit.
Worse, the impact
goes beyond to the smaller dealers. The plummeting rupee has cast a lengthening
shadow across India's tech
and appliances hubs such as Delhi's
Nehru Place
and Lamington Road
in Mumbai, with footfall down by a fifth as prices of imported electronic items
have shot up by 15 per cent over the past month alone.
Neither is there good news for gold
dealers. Not only has gold become more expensive in dollar terms, the
additional 10 per cent duty is casting a spell on their operations. The gold
ornament makers – the artisans – are losing their jobs as many traders prefer
to import finished ornaments instead.
The move to impose customs duty has
not helped the Government either. Rather, it has increased smuggling. Enforcement
agencies are now spending more to keep up the vigil. Smuggling, which had
virtually been stopped, has been on the rise. The Government needs to have a relook
at imposing additional duty. It is cheaper to lose some revenue to let the
jewellery industry prosper and pay taxes at less cost to the Government.
The impact of rupee depreciation on
the FMCG sector will be due to higher cost of imported raw materials. The
companies were already facing cost pressures and will have to revise prices.
Hindustan Uniliver and Procter & Gamble have already taken steps in this
direction.
Pulses and oil, which account for a
large part of India's
imports, will too be affected. Crude palm oil prices set the pace for prices of
other edible oils. It is imported in large quantities and any rise in its price
will add to the inflationary pressure.
On the other hand, garment and spice
exporters are happy. India
is a major exporter of spices and the recent weakening of the rupee has
reportedly boosted overseas demand of certain spices such as pepper, which
registered 33 per cent growth in quantity and 115 per cent growth in value
during the past one year since the rupee slid. Likewise, rupee
depreciation has turned beneficial for exporters of textile, leather and
automobile components.
If the dollar
continues to stay firm, knitwear exporters stand to benefit a lot, feels
garment exporters. A Shakthivel, President of Tirupur Exporters Association
says spot trade practiced by exporters of the region is helping to increase
profit and business is likely to grow by 30 per cent. Other exporters say it
has improved their competitiveness.
There has been much interest in the
recent spurt in guar gum and guar seed prices. Part of this has been because of
higher export demand. It may be noted that India exports almost 90 per cent of
the guar gum produced in the country. The depreciating rupee has made this
additive attractive to international buyers.
The flip side is that it
has made Indian cities less expensive for visitors. Global HR services firm
Mercer's survey of 214 cities worldwide has ranked Tokyo as the most expensive, while
Karachi is the least costly
place for expatriates. In its “Worldwide Cost of Living Survey 2012”, New Delhi has slipped to
113th position (from 85 last year), while Mumbai is at 114th place (from 95). Bangalore and Kolkata
dropped to 187th and 208th spots, respectively. These two cities were at 180th
and 203rd positions respectively, last year. Would it benefit the hospitality
industry?
Whatever experts may say about the
macro economic impact, the rupee slide is indeed a mixed bag of both good and
bad news for the present. In the long run, the story would be different as
input cost for goods manufactured for exports too would become dearer. ---INFA
(Copyright,
India News and Feature Alliance)
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