Strong India Rupee Stings PM Modi's Export Ambitions

New Delhi: Ajit Lakha, who runs a mid-sized garment export business in the north Indian textile hub of Ludhiana, prays daily before leaving for work that the rupee will weaken and the euro recover to cut the losses he is taking on his overseas sales.

"Perhaps God is not listening," he says. "Only a year ago, I was getting 80 rupees for each euro on garment exports to France. Now, I am getting just 67 or 68 rupees."

Thousands of garment, leather, handicraft, and gems and jewellery exporters have watched helplessly as the rupee has appreciated by a quarter against Europe's common currency over the past 12 months.

The result has been India's worst export performance since the global slump of 2009, an early setback to Prime Minister Narendra Modi's 'Make in India' campaign to launch an export-led boom as he approaches a year in power.

To counter slack external demand, PM Modi's government plans higher infrastructure spending in the budget now before parliament, but lacks the fiscal firepower for a China-style stimulus. Short of alternatives, New Delhi is starting to lean on the Reserve Bank of India to do more on the currency side to restore India's international competitiveness.

"A case is building for rupee depreciation. Otherwise, all indicators show we are entering another difficult year," a senior trade ministry official told Reuters, adding the government expected help from the central bank besides taking other measures.

Merchandise exports, which make up around 16 per cent of India's $2 trillion economy, shrank for the fourth month in March, with the 21 per cent annual decline the steepest since 2009. In part, that reflects the collapse in oil prices - India's main import is crude but its refiners also export petroleum products.

Exports to Europe shrank by near 2 per cent in the 11 months to February, reducing its share of total exports to 18 per cent and cancelling out gains to the Americas and Africa.

Sales of textiles - a major export to Europe - for instance, have slowed in the current fiscal year after growing 15 per cent in 2013/14 year to $6.38 billion.

Need Oxygen

To be sure, a stronger rupee is not all gloom for Asia's third-biggest economy which imports nearly $450 billion worth of goods a year. But the upshot for PM Modi is that his goal of doubling shipments to $900 billion in four years now looks very ambitious.

"India has become uncompetitive in some markets," said Gaurav Poddar, director at Limtex India, which exports tea to the oil-dependent economies of the Middle East and former Soviet Union. "The rouble has really hit us," said Mr Poddar, referring to the Russian currency's collapse last year.

Trade officials say exporters need a helping hand as they are fast losing competitiveness after the rupee appreciated by 11 per cent in real terms against a six-currency basket over the year to March.

"Indian exports are in intensive care and immediately need oxygen," said S.C. Ralhan, president, of the Federation of Indian Exporters Organisation (FIEO).

Yet economists say that the RBI already faces a tough task curbing the rupee, as enthusiasm over PM Modi's business-friendly policies sucks investment dollars into Indian financial markets.

In January and February, the Reserve Bank of India (RBI) bought a net $20 billion in the spot forex market.

Any acceleration in dollar-buying intervention would force the RBI to absorb, or 'sterilise,' more of the rupees that it prints lest they leak into the economy and undermine hard-won gains in cooling inflation.

"India can choose to join the global currency war by cutting interest rates - but that is not an option we have, given we are still fighting inflation," said Sonal Varma, an economist at Nomura in Mumbai.

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FIEO suggests setting up exchange neutralisation fund

KOLKATA: Taking cognisance of the adverse impact of rupee appreciation among a vast section of exporters, the Federation of Indian Export Organisations (FIEO) has pleaded with the government to set up an exchange neutralisation fund and fix the value of the dollar vis-a-vis the rupee on a quarterly basis solely for the purpose of exports. FIEO, while placing a charter before the finance and commerce ministries, has also pitched for allowing small and medium exporters to avail of cheaper export credit in foreign currencies.

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Manufacturing units hit by rising rupee, Chinese imports

Chennai, Oct 9 Larsen & Toubro feels that the rupee appreciation combined with the Chinese artificially locking in their currency is affecting some of the manufacturing units in the company. It has apprised the Centre of this and wants it to act before Indian manufacturing is badly affected.

“My appeal to the Government is impose 30 per cent anti-dumping duty on China until such time they float the currency. The day they float the currency, withdraw it (the anti-dumping duty),” Mr A.M. Naik, Chairman and Managing Director, Larsen & Toubro Ltd, told here on Monday.

L&T has a number of manufacturing units that are affected by imports from China. They are small units and hence overall the company is not affected much. However, the units – producing plastic and rubber machinery, valves and medical equipment – in Tamil Nadu and Karnataka have over 2,000 employees and get almost half their turnover from exports.

Artificially locked in

At its weakest, the rupee was Rs 48 to a dollar and at its strongest, at Rs 39.50, an over 20 per cent appreciation of the rupee. This itself was a major impact on exports. While the rupee was free floating, the Chinese currency yuan was “artificially locked in” at a low price, Mr Naik said and added that if China freely floated its currency, it would appreciate within a week and then all of L&T’s units would become competitive.

He said he had taken this up with the Government, including the Finance and Commerce ministers, and highlighted that Indian industry would be wiped out, if not badly affected, by Chinese imports.

He had even told the Government that if these businesses did not do well, the company would be forced to either close them down or sell the units. He even wanted the Government to take the matter to the WTO to straighten out the issue.

No decision now

Mr Naik said these units were struggling but L&T was not going to take a decision on them right now. “We are struggling. We can’t give up something unless we make a full representation to the Government and see if we can resolve this issue,” he said.

On a two-day visit to the city, the L&T CMD said the rupee appreciation and the Chinese currency artificially locked in offered Chinese manufacturers a 35 per cent cost advantage. L&T could make up with productivity, but not to the extent of 35 per cent, he said.

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‘Hike in DEPB rates not the solution to rupee problem’

Kolkata, Oct. 6 Urging exporters to adjust to the scenario of a stronger rupee through adoption of a hedging mechanism (forward contracts) or invoicing in currencies other than the dollar like Euro, the Director General of Foreign Trade (DGFT), Mr R.S. Gujral, said here that a hike in DEPB rates was not the solution to the problem.

He, however, admitted that the exporters were indeed in a difficult situation because of the rupee appreciation vis-À-vis the dollar.

Participating in an interactive session on ‘Post Foreign Trade Policy’, organised jointly by the Engineering Export Promotion Council and the Federation of Indian Export Organisation (FIEO), Eastern Region, Mr Gujral said efforts should be made to ensure that the foreign currency risks are addressed by the international buyer.

In the context of perceived uncompetitiveness of Indian exporters because of a stronger rupee, he said that in the long run, they had to improve technology and reduce the cost of production to emerge more competitive globally.

Assuring them help through dialogues with the Finance Ministry on issues such as easy bank credit and below PLR rates, he said discussions were already on to cut down or eliminate export documentation to reduce transaction costs for exporters.

EPCG scheme

Hinting at some relief with regard to eligibility criteria in the Export Promotion Capital Goods (EPCG) scheme, he ruled out any dilution of value additions norms.

Responding to alleged cartelisation moves by pig iron manufacturers, he told the EEPC to take the matter to the Competition Commission.

On notification of two more Land Customs Stations in West Bengal for DEPB credit, the DGFT said the matter would be taken up with the Finance Ministry soon.

VAT problem

For small and medium West Bengal exporters who are grappling with the problem of delayed VAT refunds (now said to have accumulated to Rs 34 crore), Mr Gujral said DGFT would take up the matter with the Department of Revenue. The Engineering Export Promotion Council has urged the Government to move from refund-based initiatives to an exemption-based system.

Export target

Earlier, in his welcome address, Mr S.K. Jain, chairman of FIEO, ER, said the target set by the Government of $160-billion exports during 2007-08, and $200 billion in 2008-09 was rather optimistic, particularly in the backdrop of a rising rupee and slowing global economic growth.

He listed infrastructure development, logistics support and rising transaction costs as three important issues which need to be tackled upfront if exports from eastern region have to pick up in a big way.

Commenting on the rupee issue, he said: “we have reached a stage when we have stopped entering into new contracts.”

Relying on secondary data on various sectors, Mr Jain said export realisations on account of rupee appreciation had fallen by 12 per cent for chemicals, 6 to 6.5 per cent for textiles and likely to dip by 20-25 per cent for processed foods and agro products, electronics & electricals and steel products.

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Kamal Nath says exporters need more relief

New Delhi, Oct 6 The Union Commerce and Industry Minister, Mr Kamal Nath, on Saturday gave a qualified welcome to the mini-package for exporters announced by the Finance Ministry in the wake of the appreciating rupee, stating that he would continue to press for more relief required for exporters.

Mr Nath said at a news conference in his office here that rupee appreciation, though a sign of resilience of Indian economy, has become a matter of particular concern to exporters whose import-intensity in export production is not much. He said that a Committee has been set up to address this serious concern.

He also said that last week the Prime Minister, Dr Manmohan Singh, had asked Dr C. Rangaraman, Chairman, PM’s Economic Advisory Council, to study the problems plaguing the export sector in the aftermath of the appreciating rupee, as also the slowdown in industrial production, and prepare a report within a month.

He welcomed the Finance Ministry’s decision to allow interest on Exchange Earners Foreign Currency (EEFC) account and also extending services-tax exemption to four more areas, making such exemptions available for seven services. He said that his ministry would plead for inclusion of other services-tax exemption too and the modalities for this were being worked out.
Cost of relief

To a specific query about the cost of the relief announced on Saturday, in the light of the Rs 1,400-crore package announced in July 2007, Mr Kamal Nath said that it was not proper to estimate loss of tax revenue for these incentives to exporters as they are only notional. He said export activities generate their own spin-off effects, which produce more revenue to the exchequer.

Stating that export was no longer an exchange-earning activity but more of providing gainful employment through sustained economic activities, the Minister said that despite the appreciating rupee he was not revising the export growth set for the current fiscal, which is likely to be 20 per cent in dollar terms. He said that product coverage under Vishesh Krishi and Gram Udyog Yojana employment-intensive industries would be expanded, and he cited minor forest produce and food processing industries as those with good employment potentials. Meanwhile, the President of the Federation of Indian Export Promotion Organisation, Mr G.K. Gupta, and the Vice- President, Mr A. Sakthivel, while hailing the relief package, regretted that main services such as commission to foreign buyer, overseas travel, courier charges and charges to customs house agents, which continue to impact all exporters substantially, remain outside the remission mechanism.

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Exporters get more sops on service tax, credit

Rupee relief: Enlarged coverage of export schemes

Bowing to exporters’ demands, the Government on Saturday announced a new set of relief measures for exporters in the wake of rapid appreciation of the rupee in recent weeks. On Thursday, the rupee hit 39.36 per dollar, is the strongest since March 1998.

The latest package comes on top of the estimated Rs 1,400- crore financial relief measures, announced in July this year, which included accelerated reimbursement of dues to exporters, reduction in pre-shipment and post-shipment credit and revision in drawback and DEPB rates.

The Finance Ministry had also in mid-September said that refund of service tax would be available in respect of four services, which are not in the nature of “input services” but could be linked to export of goods.

The relief measures announced on Saturday included widening of the coverage as well as extension of the time period of the reduced export credit, refund of service tax on three more services, a provision to pay interest on exchange earners foreign currency (EEFC) accounts and an increase in the revenue ceiling on Vishesh Krishi and Gram Udyog Yojana (VKGUY).

More products are proposed to be covered under VKGUY, which is a scheme to promote export of agricultural and village industry products. For this purpose, the revenue ceiling for 2007-08 has been fixed at Rs 500 crore, up from Rs 200 crore set earlier.

The coverage of the 2 per cent interest subvention, made available in July 2007 to nine specified sectors, has been expanded to include sectors such as solvent extracted de-oiled cake and plastics and linoleum. Also, jute and carpets (under textiles) and processed cashew, coffee and tea (under processed agricultural products) would be eligible for this.

The scheme of reduced interest rates under pre-shipment as well as post-shipment credit would now be applicable up to March 31, 2008 as against the earlier announced December 31, 2007. The three new services for which refund of service tax would be available to exporters are general insurance services, technical testing and analysis agency services and inspection and certification agency services. Official sources said that refund of service tax on general insurance services would lead to revenue loss of Rs 1,000 - 1,200 crore in a financial year to the exchequer.

On EEFC accounts, the Government has now said that such accounts would be interest bearing so long as certain conditions are met. It has allowed banks to determine the interest rate, but stipulated that interest would be permissible on outstanding balances to the extent of $1 million per exporter. The facility of availing interest on EEFC accounts would be valid up to October 31, 2008. Such accounts should be in the form of term deposits with a maturity of up to one year, the RBI has said.

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Rising rupee does not spare domestic manufacturers

New Delhi, Oct. 2 Not only has the strengthening of the rupee vis-À-vis the greenback been denting export margins, but it is now beginning to hit those manufacturing for the domestic market.

Among those affected are manufacturers whose products are substitutable by imports, which have turned cheaper as the rupee hardens. The trend is evident in a bevy of sectors such as chemicals, textiles, standardised auto components and tyres, where imports have been on the rise.

Domestic suppliers to export firms are also taking a hit as exports falter. Further compounding the woes of the domestic manufacturing sector is the fact that India is fast turning into a high-cost economy, with spiralling real estate prices, increasing interest rates and high cost of infrastructural overheads such as power and freight costs, all of which translate into whittling down of margins.

Margin squeeze

Mr Ashish Bharat Ram, Managing Director, SRF Ltd, said, “The rupee appreciation is adversely impacting those domestic manufacturers where the product is substitutable by imports.” He explains that even in cases where raw material is imported, margins are being squeezed. “Imports of raw material from China, for instance, are of special concern as the yuan has not been revalued, and this puts pressure on margins even further.”

Jubilant Organosys’ Executive Director (Finance), Mr R. Sankaraiah said, “The impact of the rupee appreciation is also on those industries that are importing commodities as raw material at par with international competition.”

The rising rupee has, on the flip side, rendered imports into India more competitive. Sona Koyo Chairman and Managing Director, Mr Surinder Kapur, said, “An impact would be felt by those who make standardised auto components where import substitution is possible.”

In the case of textile products, during the 12-months to March 2007, imports from Pakistan jumped 66 per cent while cotton yarn and fabric imports from Pakistan were up 74 per cent and from Sri Lanka 65 per cent, according to latest DGCI&S data. The auto components sector is seeing similar trends.

Impact meter

The Marketing Director of JK Tyres, Mr A.S. Mehta, said, “When domestic players share the same platform as overseas players, the impact is serious. While imported goods prices are down, manufacturers who use local raw material have no advantage in production cost. Chinese tyre imports have always been a concern. Partial withdrawal of subsidy by the Chinese to their manufacturers had reduced the price gap, but rupee appreciation has once again made it an issue.”

Firms supplying to exporters are also taking a hit as exports wobble. Mr Mukund Choudhary, Managing Director of Spentex Industries, said, “Most of our domestic yarn sales go into deemed exports. Since exports of readymade garments have been hit, naturally it affects our domestic sales.”

A number of leather manufacturers in smaller centres such as Agra and Kanpur, who supply to exporters, are also witnessing a dent in sales.

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Challenge for manufacturers

Domestic manufacturers, hit by a strong currency and cheap imports, need to sharpen competitive edges by cutting costs and upgrading technology.

For many producers in the Indian economy the rising rupee must seem like a viral fever that spares no one. Till a few months back the exporting community was hit by the rupee’s strengthening against the dollar and the Commerce Ministry, like a good doctor, was promising relief for those merchandise exporters complaining the loudest. Now it is the turn of domestic manufacturers to feel the effects of a rupee that persists at high levels with some analysts predicting t he dollar will stay below Rs 40 for a sustained period. Since imports have become cheaper, it is not only domestic manufacturers of semi-finished or finished goods such as auto components and tyres that have to fear competition from imports, but also those who produce raw materials. Soon, producers across the spectrum will begin to get restive.

They should not because extreme nervousness tempts one to reach for the help-line to the Commerce Ministry that can at best offer temporary and partial concessions. Instead, they should learn from a section of the exporting community that has turned an apparent handicap into a challenge to effect structural adjustments in the product mix, pricing strategies and markets, apart from cutting costs wherever possible. Textile exporters, for instance, have begun to shift to euro-currency markets, increase production capacities and trim the flab that a weak rupee’s price advantage allowed them to accumulate. The high-tech sector, likewise, has moved up the value chain but it has done more by shifting incremental services offshore, closer to clients and to areas whose currencies are still weak against the dollar. Domestic manufacturers do not have that comfort; instead, they are additionally burdened by rising costs on two counts, apart from the effects of a strong currency. One, the historic cost of poor infrastructure and power shortages and, two, those associated with rising wages on the heels of strong economic growth. Cheap imports following a strong rupee add an extra bitterness to the manufacturers’ cup of woes.

But here lies the challenge of sharpening competitive edges by cutting costs wherever possible. One productive way of doing so is to pressure policymakers into doing their bit for power generation, labour law reforms and land acquisitions —in effect, setting in motion the next and most crucial reforms for growth into the next decade and beyond. The second is to upgrade technology wherever possible to mitigate rising wage inflation and achieve better logistics. The third has been used most effectively by the US, Japan and the East Asian tigers, namely exporting production to low-cost centres. India has its own equivalent of a low-cost but onshore locale — the unorganised hinterland whose growth could offset some of the cost disadvantages of domestic producers.

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Rupee appreciation upsets export arithmetic

Imagine a Tirupur garments exporter competing with a Chinese company for American market share. This is a classic example of an Indian exporter running economic exposure on his business. The exporter has a basic transaction exposure against the US dollar. But he also runs an equally or even more significant economic exposure against the Chinese yuan. If the yuan does not appreciate or rises less than the rupee’s gains against the dollar, the Indian exporter faces a serious threat to his share in the US market as there is an effective Chinese price cut in such a scenario. Any attempt to match the effective lower Chinese prices actually compounds the problem for the Indian exporter as his final rupee realisations are under greater pressure then.

The Chinese example has been cited here to just highlight the issue of economic exposure which Indian exporters face in today’s extremely competitive global trading environment. Indian exporters are obviously facing competition from a number of other countries also in all their main export markets. It is not surprising, therefore, to see that while exports grow double-digit in dollar terms, the growth in rupee terms is severely constrained by the complex and inter-connected risks in global merchandise trade. For the first five months in FY-08, for instance, while growth in dollar terms is 18 per cent, that in rupee terms is just 5 per cent.

At one level, these developments possibly just show the limits of export-led growth and activity in a country such as India. Indeed, with exports constituting only around 12-13 per cent of GDP, one may wonder how critical is the export-led model for India. The domestic market is huge and the level of consumption/investment demand is high enough for the country to run, even if only modest now, trade deficits.

It is quite different in the case of China where exports are a national industry (as a matter of deliberate policy) and account for more than a third of total national income and domestic consumption (though now opening up) is still largely suppressed. This structural difference between India and China is also reflected in the fact that while Chinese FX reserves are basically export surpluses, Indian FX reserves are basically capital account surpluses. At another (micro) level, the export statistics also show that in a complex and competitive global trade environment, Indian exporters are possibly not yet tuned into the need for proactive (and sometimes pre-emptive) financial risk management.

Hedging economic exposure may possibly call for more advanced financial instruments (such as currency options on the currencies of competing countries for instance) and their active use. But it is one of the quirks of the global trade/markets system that while a country such as China seeks to enjoy all the benefits of open, free consuming markets of the world (specifically the US), it picks and chooses which part of the global trade/market rules it will comply with. For instance, it heavily manages its yuan currency and also, as a corollary, does not allow internationalisation of the currency. (Most other Asian currencies except Japan also fall in this bracket. Japan has traditionally intervened heavily in its currency but the yen is one of the key international currencies also. Also to be noted is that Japan has not intervened in the yen since March 2004.)

Therefore, hedging economic exposures actively is still some way off. Indian exporters, though, can well and truly hedge transaction exposures with the available instruments in the local markets. The underlying math relating to the export sector — on export costing and pricing for instance — only seems to make that imperative.
The underlying math on exports

An analysis of the math (see Table) is necessary to throw light on the underlying economics of the export trade at the individual exporter level. If not anything else, it may at least point to how important active hedging is for Indian exporters in the current and emerging environment.

Consider an Indian company which exports only to the US market. (This is quite a realistic scenario in Tirupur, for instance, where there are a number of mid-size exporters who sell almost entirely in dollars/ to the US market).
The Economics

Equation 5 also brings out clearly how rising costs and an appreciating local currency can apply pressure on both the cost and revenue sides and render the export trade quite uneconomic.

For example, assuming per unit cost of production is Rs 100, an exchange rate of Rs 45 to the dollar and a price elasticity of 2, one can see that the unit dollar price for the exporter will be 100/45 (1-0.5) = 4.5.

Now, if production costs rise and the local currency also appreciates (as has happened in the case of Indian exports), without any change in the price elasticity (elasticities are quite sticky in the short/medium term and also unlikely to change in the case of low value added items), the exporter will be literally priced out by his competitors who have not experienced such cost side pressures/local currency appreciation. Assuming that unit costs rise to Rs 120 and the rupee appreciates to 40 against the dollar, one can see that the equilibrium dollar price for the exporter should rise to at least $6 per unit. How many mid-size Indian exporters have the pricing power to increase negotiated and agreed upon prices?

Compare the above workings with that for a Chinese exporter who has not experienced such cost side pressures and also, importantly, benefits from a relatively much more stable currency. The Chinese yuan, for instance, has been allowed to rise around 9 per cent against the dollar in the two years since July 2005 — from 8.28 to 7.51 now — but the Indian currency is up 10 per cent in just the last 7 months.

It is obvious that the Chinese exporter will have a significant price advantage which can be extremely useful in increasing market share — particularly in low value-added items.

Equation 5 tells in a very concise manner how critical it is for the exporter to protect the (initial) exchange rate based on which his export pricing has been worked out. Such protection is achieved only through active and systematic hedging.

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Exporters offload dollars in forward mkt

MUMBAI: Following the subprime crisis in the US, Indian firms are feeling the heat of a crunch in dollar-denominated credit lines, at least in the near term.

This has led to a sharp decline in dollar funds in the Indian banking system, although, concidentally, rupee liquidity is high. In this scenario, several exporters have been forced to buy dollars in the spot market, where the rupee is trading at 39.60 levels against the dollar, and then sell the dollars in the forward market.

This had led to a decline in yields on forward contracts. However, it has also resulted in the dollar posting small gains against the pound sterling and the euro in the past few days.

However, the marginal rise of the dollar against such currencies cannot be attributed to economic factors or cannot be perceived to be a longer-term phenomenon, as this is due to the surfeit of dollars being sold in the forward market.

Typically, domestic exporters receive post-shipment credit denominated in foreign currency from banks in India, which receive dollar credit from banks abroad. However, the rate of interest on credit lines for a period of one to three months have risen sharply, as compared to credit lines for a tenor exceeding three months.

A senior treasury manager said that “many banks in India have exhausted their dollar borrowing limits, following a cap fixed by the Reserve Bank of India. That is why most of them prefer lending post-shipment credit in rupee terms rather than in dollar terms, as they prefer to retain the latter within their hands, in anticipation of a dollar shortage. Hence, it is seen that funds are borrowed in dollar terms and swapped into rupees, which is then used for lending to clients.”

Standard Chartered Bank MD & corporate sales head (global markets) Hemant Mishr pointed out that “despite the measures undertaken by the US Federal Reserve and the Bank of England, the tightness in monetary conditions continues. This is exemplified by the fact that the the three-month repo rate is quoting at at 5.25%, a premium of 50 basis points ovber the Fed funds target rate.”

Treasury officials feel that even as overnight rates have been cut, rates in the money market have not fallen. This is only indicative of a dollar squeeze in the near term.

Market sources said that this is also to do with the fact that dollar interest rates are expected to dip further over the longer term. Within India, rupee flows have been abundant, due to two main reasons, one being the excessive intervention by the Reserve Bank of India, to prevent the rupee from rising too much and secondly because of government spending, in the wake of the advance tax outflows in mid-September.

Further, traders in the local forex market expect the liquidity to swell up further, given that there are some coupon payments likely to happen within this week.

With more and more traders selling the greenback on the forward market, the forward premia have dipped sharply in the local market. The premia on near-term contracts have remained below the 1% mark for a while now. In the short-term forward market, the cash-spot, cash-tom and tom-next are all trading at a discount.

Hinduja group group CFO Prabal Banerji said, “Exporters are facing a double-whammy situation. On one hand, the dollar-credits are getting increasingly restricted due to the subprime crisis and on the other hand, the rupee is showing no signs of weakening.

Selling dollars in the forward market is the only option they have at the moment, but given the extremely low premia on forward contracts, it is unlikely to make any significant difference to their profit levels.”

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Rupee rise will hurt export growth

NEW DELHI: The appreciating rupee is expected to hamper export growth while encouraging imports and thereby the country’s trade and current account deficits are likely to come under pressure, the economic analysis wing of Moody’s, the global credit rating agency has said.

In its report on India titled ‘India Outlook: The Elephant’s Charge Expected to Slow’, Moody’s Economy.com has said: “… the strong rupee will continue to temper the expansion of India’s export sector and support import demand, putting even more pressure on the country’s gaping trade and current account deficits”.

In just the first four months of the current fiscal year, the trade deficit, according to official data, has already increased by 61 per cent at $25,619.85 million as compared to $15,841.22 million during the same period a year ago.

Lower export target

While the growth in exports, fixed at $160 billion for 2007-08, is expected to be at a brisk pace during the current calendar year, it is the deceleration in global demand coupled with the effect of a strong rupee that is likely to put pressure on the country’s export sector, the report said.

Mainly responsible for this state of affairs would be the slowdown in import demand from the U.S., which generally accounts for a large chunk of India’s total exports.

In a large measure, the neutralising factor would be the healthy import demand from China as it would continue to cushion much of the impact of a slowdown in shipments to the U.S., the report said.

BPO may take a hit

Moreover, as India’s services exports, in particular, business process outsourcing would remain resilient, “we expect export growth to book double-digit gains again this year,” the report concluded. Also, another reflection of the economy remaining buoyant would be the strong demand for inbound shipments owing to the country’s heavy dependence on imported energy, machinery and capital equipment for infrastructure development, it said.

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Strong Re emerges as top impediment for exporters

A robust rupee has emerged as the most crucial impediment for 91 per cent of the country's exporters and outlook for the next six months does not look bright, a FICCI survey has said.

The survey conducted in the first quarter of 2007-08 revealed that for 91 per cent of respondents from 286 companies across various industry sectors, appreciating rupee was the main impediment to business performance.

In the last survey conducted by the Chamber in the last quarter of 2006-07, 75 per cent of exporters regarded currency appreciation as the primary risk factor.

It showed that the new situation arising out of dollar depreciation against rupee is forcing exporters to improve business in other currencies and to establish protective clauses in their contracts. "The concern is widespread amongst small, medium and large companies alike. The members of the exporting community have indicated that they are now taking steps to fortify their defenses," a FICCI statement said.

It said exporters are using mechanisms such as forward contracts, shifting to other currencies and establishing protective clauses in their newly set contracts.

"Exporting more to regions like the Middle East and the European Union, a strategic move to partially nullify the impact of the strengthening rupee vis-a-vis the US dollar, is also being resorted to by some exporters," the survey said.

Exporters saw rising prices of raw materials a major constraint in staying competitive at the global level. The results of the present survey showed that nearly three- fourths of the respondents have been hit due to the rising cost of raw materials.

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