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Rupee’s Free Fall: SOME SMILE, OTHERS FROWN, By Shivaji Sarkar, 23 August, 2013 Print E-mail

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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