Even as the rupee has scaled new heights, reflecting to some the overall strength of the Indian economy, an entire category of businessmen and women are in deep distress. Spare a thought for the garment exporter in New Delhi’s Okhla industrial area or the one in Tirupur, Tamil Nadu. Already facing intense competition from Bangladesh and Vietnam, whose currencies have been depreciating in the same period, as well as sharply rising cotton prices, these exporters have seen their wafer thin profits disappearing overnight. Bear in mind that over 70% of Indian textile and apparel exports are dollar-denominated.

Nor have the various preferential trade agreements been particularly helpful. The India-Mercosur one, for instance, doesn’t include textiles and apparel items. As a consequence, these face prohibitive import duties of up to 35%. Mercosur comprises Brazil, Argentina, Uruguay and Paraguay.

Over the last two years, analysts had placed the US dollar’s value at about Rs69-70, which means the rupee is currently up over 7% at a time when the Chinese yuan has declined.

The strengthening rupee has taken a huge toll on exporters in other areas like gems and jewellery and electronics as well. These companies with operating margins of 10-12%, already hit hard by wage inflation, are now taking a massive hit to their bottom lines. But that’s not all. Domestic manufacturers, in industries ranging from electrical parts to chemicals and solvents, who compete with imports from China, are feeling the pain as well. As the economies of manufacturing have got distorted, thousands of small and medium enterprises are reeling under the impact of an irrationally strengthening rupee. The first indications are already available in the March trade deficit, which widened to a four-month high of $10.44 billion following a 28% surge in merchandise imports.

Unfortunately since the rupee’s strength hasn’t come on the back of stronger economic fundamentals like rising productivity, what it has done is to wipe out all the productivity gains for exporters that recent reforms by the government enabled. Instead, it has effectively led to subsidising imports while reducing the overall export competitiveness.

Eventually, at this level, the overall economy will get impacted. Citing UBS Securities India Pvt. Ltd’s calculations, every 1% appreciation in the rupee could lead to a 0.6% cut in Nifty earnings.

Not unexpectedly, the appreciation in the rupee hasn’t hurt the big boys of Indian industry as much, which probably accounts for the muted voices against it. The Federation of Indian Export Organisations (FIEO) obviously doesn’t carry the same weight as some of the other similar organizations that represent the interests of the larger Indian companies. FIEO has put out a request to the government for incentives in the form of interest subvention, currently available to the manufacturers, to be extended to merchants and other sectors of exports.

In addition, it is looking for some change in the Merchandise Exports from India Scheme (which gives incentive of about 3% in the form of duty credit scrip to the exporter to compensate for his loss on payment of duties) in the hope that this will offset somewhat the losses on account of rupee appreciation. But these moves, even if they find favour with the government, are likely to offer little succour to small and medium enterprises (SMEs) that are under the cosh.

There is also no rational explanation for this unexpected spike. Given the technical rules that govern the rupee market, rules that the Reserve Bank of India has been at pains to communicate over recent years, it has come as a shock. Conspiracy theorists are already speculating that it has the makings of a possible currency attack but in the absence of any evidence to show it was concerted, it is perhaps an exaggeration to call it that. Over the years, countries like the UK, Switzerland and Greece have had to handle the fallout from an overtly strong currency and in the case of the UK and Greece it did lead to a recession.

Sure, a strong rupee will force Indian exporters to look for greater efficiency and increased productivity while also diversifying into more value-added exports that are less sensitive to price fluctuations. But before that happens, there is the small matter of surviving the current run.

Source: livemint