ECONOMIC HIGHLIGHTS

New Delhi, 9 January 2008

Living With Stronger Rupee

STOP GOVERNMENT SUCCOUR

By Dr. Vinod Mehta

(Former Director, Research ICSSR)

The rupee has been steadily appreciating vis-à-vis the US dollar since 2003.  But in the last about six months the appreciation has been more rapid. This is causing serious concern among the exporters especially those engaged in the export of garments, leather goods etc.  It is also affecting the software companies which are heavily dependent on the US market for their exports.

The rupee has risen by as much as Rs 5 to the US dollar (Rs 9 against the British pound and Re one against the Euro). Those in the foreign exchange business are of the view that the value of the rupee vis-à-vis the dollar will range between Rs 38- 41 during 2008 as against Rs 49 in 2002 and Rs 45 in 2003.

Besides, because of the strong rupee, India will not be able to meet its export target for the year 2007-08 and 2008-09 which is expected to fall by US $15- 20 billion during the current financial year. 

The industries that have been hit hard are textiles, leather, handicrafts and the service sectors.  Reportedly, nearly four million people have lost their jobs in the past two years alone because the foreign importers of Indian products have started buying similar products from other countries.

True, this is a part of the ongoing changing economic dynamics. However, the economic fundamentals are strong, foreign investors are quite upbeat about the Indian economy and are thus willing to pour in more money. Therefore, as of now one cannot foresee any possibility of the rupee losing its value.

One side effect of this is that the rupee is being increasingly accepted as a “hard currency” in many countries even though the Reserve Bank of India may not like it because it has not yet declared the rupee as fully convertible. But the peoples’ perceptions are entirely different; they are increasingly believing that the rupee could make a good asset! This is also one reason for the rupee becoming stronger.

The software companies are the hardest hit as their software exports are mainly for the US market. To quote: “Indian software firms get 60 per cent of their revenues from the US and 1 per cent appreciation of the rupee against the dollar can impact earnings before interest and tax margins by between 30 and 50 basis points. Irrespective of the fact whether the company is big or small, all of them have been hit. The margins may be impacted by as much as 4 per cent.”

Apart from the IT companies, small scale textile and leather units have also been hit.  It is no secret that foreign importers like Wal Mart and others source unbranded garments from countries like India, Pakistan, Bangladesh, Sri Lanka, Vietnam, Indonesia, the Philippines, China etc. With the Indian rupee becoming stronger the foreign importers have to pay more in dollars to the Indian exporters now for, say, a similar shirt that they were to import from Pakistan or Vietnam.

Therefore, the foreign importers of Indian garments have switched over to buying their requirements from other countries. Hence the fall in our exports and consequent closure of some units and job loss. This is also true of leather and other products.

But there is another set of people, the importers, who are happy about the strong rupee as it makes imports cheaper. For instance, India imports huge quantities of oil and with a stronger rupee it will pay less in dollar terms for its import. If the exporters are fretting about the declining export earnings because of the rupee’s appreciation, we should also be happy that the appreciating rupee also brings down our import bill of a number of goods and commodities like capital goods, oil, pulses, grain etc. 

No doubt, the appreciating rupee is only a temporary phenomenon which will stabilize at some level but we can use this opportunity to import capital goods to strengthen the capital base of our manufacturing sector. The time is also appropriate to import and build inventories of critical raw materials. We can also build our stocks of grain, pulses and edible oil to keep a check on inflation.

However, the concern of the small exporters is also genuine and needs to be attended to. Being labour intensive any loss of an export order will force them to close down leading to job losses. In the past, various Governments used to devalue currencies to protect their exports but devaluation as an instrument to check appreciation of any currency is now outdated. 

Moreover, because of the hue and cry raised by the exporters the Government came out with a Rs 1,400 crore relief package for exporters in July last year. It included interest subsidy to the tune of Rs 600 crore on bank loans for the small and medium sized exporters and Rs 800 crore on duty drawback to all the exporters on inputs used in the manufacture of export goods and other measures. But according to the exporters, the package is not sufficient notwithstanding the fact that it is expected to mitigate some of their problems. Happily for them some more relief packages are on the way.

The ideal thing would be for the Reserve Bank of India to manage the exchange rate fluctuations within a certain band to be determined by it along with managing the flow of foreign funds. But more important than this is that our business houses and industries must realize that as the economy gets stronger the rupee will also get stronger in relative terms.

Therefore, businesses which are heavily oriented towards the US markets must factor in the appreciating rupee in their calculations and devise strategies to check the erosion in their export earnings. Moreover, they also need to reduce their dependence on the US market and move towards the European market, Japan etc and start earning in Euro and Yen. 

The small and medium scale units engaged in the export of garments, leather goods, handicrafts etc must upgrade their technologies, plan newer products with newer designs to remain competitive. The other strategy could be to slowly switch over to branded products which will not then have to compete with unbranded products from countries like Indonesia, Vietnam or Bangladesh.

However, for a large number of people the exchange rate variations do not have much of a meaning unless some of the items of their daily consumption like pulses happen to be imported. The common man is concerned more with the domestic inflation which affects his living standards and not the appreciation or depreciation of rupee which is remotely connected to him. Fortunately, the domestic rate of inflation has come down which should make the consumer relatively happy.

In other words, there is no need to panic about the rupee’s appreciating value as it will not affect the common man to any significant extent. In economic terms, it means an automatic correction in the exchange rate and every player in the foreign exchange market adjusts its requirements accordingly.

The packages for exporters are unnecessary but in the given situation they are perhaps needed to meet the export target as well as save jobs. But this cannot be a long term measure. The business must learn to live with the strong rupee in this era of globalization, develop appropriate business strategies and stop looking for succor from the Government. ----INFA

(Copyright India News & Feature Alliance)