As the rupee appreciates, the exporters earn less in rupees for each dollar of revenue they bill overseas clients. The hardening of the Rupee makes Indian products more expensive to foreign customers. Industries which source their raw materials from the domestic market now have to face the competition from the low cost nations such as China. In the past four months, the export growth had fallen 30 percent. The effect is seen across the sectors and millions are put out on the streets. The Government has woken up to the fact that its export target of $160 billion can’t be met. The most affected are the textiles, leather and handicrafts industries. The fastest growing IT industry, too, is no exception. Seafood exports too, are taking a hit.
Many are to put up their shutters and reduce their workforce. Some have made up their mind to export their raw materials from low cost Asian countries. They are in some cases, unable to turn to other markets, as they too are dollar traded. IT firms like Infosys are reusing their code. Textile exporters are exploring the possibility of exporting through Rupee billing to pass over the currency risk to foreign buyers, allowing themselves to earn profits through manufacturing alone. In other words, buyers are being asked to pay more for their exports. Pharma companies, one of the key sources of foreign exchange, too are hurt, and are busy lobbying for Government sops.
Earlier some economists were of the opinion that an appreciation in Rupee wouldn’t necessary lead to a decline in exports as a sizeable percentage of the exports are import led. With rupee appreciation, imports were supposed to become cheaper and the manufacturers were expected to leverage that benefit to make good of the erosion in the price competitiveness on account of hardening. RBI was expected to relax its grip on the interest rates, which would have made the exporters to source goods for export purposes at a cheaper cost. They seem to be right, but only when taking some aspects in account. The strengthening of the Rupee has made sourcing of cheaper raw materials from abroad easier, as it makes imports seem less expensive. There is a surge in the exports of petroleum products, gems and jewels, all of which are import led exports. The overall export growth rate was the highest in the past year and a quarter in October. The figures could as well be misleading, as bigger firms are likely to suffer loses to keep their presence. But, exports have taken a hit in other sectors such as IT, textiles, handicrafts and pharma.
Exporters are running to the Government for handouts in the form of customs duty reductions, tax exemptions and interest subsidies. “There is an urgent need for the government to take measures to bring relief for exporters and help them not lose their markets,” said Ganesh Kumar Gupta, president of the Federation of Indian Export Organizations in New Delhi. The Commerce & Industry Minister, Mr. Kamal Nath, had written to the Prime Minister, Dr Manmohan Singh. “You have to make exports competitive. Rupee appreciation is obviously hurting the exporters.”The government, in October, had notified refund of tax paid by exporters on three additional services of general insurance, technical testing and analysis, and inspection and certification.
The Finance Minister P Chidambaram had ascribed the fall in inflation to the appreciation of Rupee. He added that the appreciation of Rupee is not that bad as, “Strengthening of the Rupee has led to a decline in rupee prices of imported goods, contributing to a fall in inflation from its highs in 2006-07″. To link the fall in inflation to the appreciation of Rupee, but, is to substitute the cause for the consequence. It should be obvious that it is a fall in inflation which must lead to the appreciation of Rupee.
Whenever a currency is overvalued in relation to the other, it encourages imports and discourages exports. It is the overvaluation of Indian currency which has made the imports cheaper and exports less profitable than they otherwise would have been. It makes the price of imports less in terms of the Indian currency and the price of exports high in terms of dollar. It discourages United States from buying Indian exports.
As the overvaluation of rupee makes Indian goods expensive in terms of dollars, the Indian exporter would have to reduce his price in terms of Indian rupee in order to meet the competition of other sellers in the American market. The exporter keeps away from that, as he can realize much more profits from the local market as of inflation. The favoring of imports over exports in the recent times certainly is not a coincidence. We have only our own policies to blame here.
When exporters push for Government handouts, it is forgotten that it is the very Government regulations which lead to fluctuating exchange rates. Exchange ratios are, ideally, not to be arbitrarily set by the government, or to be left to the market to decide. Each currency should be strictly defined in terms of gold, and fixed permanently that it is interchangeable and redeemable at that weight. When done so, each and every currency would be anchored to each other at a fixed exchange rate, that seasonal fluctuations wouldn’t wreak havoc on the export or import communities. The maintenance of fluctuating exchange rates and Government subsidies would only reduce the incentives to innovate and hence impede it.