Exports decline 4.7% during Rising rupee a concern for exporters

Transcription

1 Exports decline 4.7% during Rising rupee a concern for exporters India s merchandise exports for the fiscal year , declined by 4.7% from around US$ 184 billion at the end of to US$ billion at the end of The decline in exports is primarily attributable to global meltdown, which had engulfed the world economy during the last quarter of 2008 and had continued unabashed through out As a result of the global crisis, India s export shipments destined to Europe and North America had reduced significantly, resulting in negative exports growth for thirteen consecutive months, from October 2008 to October Since November 2009, exports have again started showing signs of revival and have grown steadily since then. During March 2010, exports grew at the fastest ever rate of 54% over the same month last fiscal. Exports is an important sector for the India economy, since it accounts for a share of around 20% in the country s Gross Domestic Product (GDP) and is also among the largest employers. US$ Billion FY 2010: India's Trade Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar In Percent Exports Imports Trade Exports Growth (RHS) SOURCE: CMIE

2 The Government of India has set a target to grow India s exports by 15% during to US$ 200 billion. With visible signs of broad-based recovery across the globe, the target looks feasible, and is further supported by a recent forecast by the World Trade Organisation (WTO), which expects the world trade to grow by 9.5% during However, the continued poor performance of some of the key export sectors and the appreciation of Indian rupee may adversely impact the prospects of India s exports in coming months. Sectors like engineering, readymade garments, leather, carpets, oil meals, petroleum products and gems and jewellery, which together account for about 70% of India's exports, have either shown no or negative growth in recent months. While, India s engineering goods exports, has been adversely effected in the US, gems and jewellery exports, and chemicals and related exports have been more unfavourably affected in the EU market. Handicrafts, including carpets, which were badly effected even in , performed even worse in in both EU and US market, with a negative growth averaging more than 30 per cent. On the other hand, appreciation of Indian rupee against the US dollar in recent months is putting increased pressure on the margins of Indian exporters. Indian rupee has appreciated more than 12% against the US dollar during the period from March 2009 to May 2010, compared to Chinese Yuan, which appreciated, by 0.1% during the same period.

3 March'2009 to May 2010 Indian Rupee vs Chines Yuan: A Comparison* Percentage Change in Exchange Rate India China SOURCE: Pacific Exchange Rate Service * Negative value indicates appreciation of the currency against the US dollar Appreciation of Indian rupee against the US dollar may be explained by surge in foreign capital inflows in India. Seeking higher returns on their investment, the international investors borrow funds in dollar markets, where liquidity is ample and interest rates are low because of anti-crisis measures, and invest in equity, debt and real estate in emerging markets like India, where returns are much higher. As of May 18, 2010, FII s invested close to US$ 11.3 billion in the Indian debt and equity markets, during The Balance of payments data, recently released by the Reserve Bank of India (RBI), indicates that net portfolio investment inflow during April-December 2009 amounted to US$ 23.6 billion, as compared with an outflow of US$ 11.3 billion during the April-December 2008.

4 Net FDI and Portfolio Investment in India US$ Billion FDI Portfolio Investment Apr-Dec 2008 Apr - Dec SOURCE: RBI Since, the rupee appreciation causes dollar value of country s exports to rise, the current bout of rupee appreciation along with high inflation is eroding the competitiveness of Indian exporters in international markets. While the exact impact of rupee appreciation on the exports sector may be difficult to gauge, it adversely impacts export products like textiles and garments, which are indigenously produced in India by raising the dollar price of these goods in international markets. On the other hand, it favourably impacts export products, which are produced using inputs, procured from international markets by reducing the dollar price of such inputs. According to various news reports, the appreciation of Indian rupee against US dollar is forcing more and more small and medium enterprises, especially in the textile sector, to lay off workers or close down. According to a few industry experts in Southern Textile hubs of Tirupur and Bangalore, a factory closes every week. Garment exporters from Tirupur explain that exporters had booked current orders when the dollar was worth Rs and it has dropped to Rs 44 since then.

5 Since the garment exporters cannot pass on the resultant increase in dollar costs of their products to consumers in US, out of the fear of loosing out to China or Bangladesh, they have to operate on reduced margins hoping to make up through high volumes. Appreciation of Indian rupee has also adversely affected the outsourcing industry in the country. This is because, while the local costs of the industry have increased due to rising staff salaries, appreciation of rupee has reduced their revenues. Since, two-thirds of the outsourcing business in India comes from the US, appreciation of Indian rupee vis-à-vis US dollar is worrisome for the industry. What Next? In the past, in order to prevent the competitiveness of Indian exporters and to retain its control over the pace of expansion of money supply, the RBI did resort to open market operations, which involved purchase of dollars. However, this time with domestic inflation in double 1 digits in recent months, RBI may have a tough balancing act to do. This is because if RBI tries to arrest rupee appreciation by purchasing dollars from the market, it would lead to increase money supply in the system, which would fuel inflation. On the other hand, if RBI aggressively tries to tame inflation by raising key policy rates (repo and reverse repo) and hence interest rates in the economy, it would further encourage FII s to park more funds in the Indian markets, given the fact that the future of economies in Western Europe and North America continues to be uncertain. Nevertheless, with India's balance of payments statistics pointing towards high and persistent trade and current account deficit in recent years, any process, which renders exports more expensive in dollar terms and imports cheaper in rupee terms, cannot be ignored. 1 During the month of April, inflation was at 9.59%