Exporters will have to cut costs to remain internationally competitive with the dollar weakening
Many Indian small and medium enterprises in labor-intensive, export-oriented industries have been badly hit by the unexpected depreciation of the American currency. Profit margins have been squeezed and in fact, much worse has happened.
Many factories have shut down. Thousands of workers have been thrown out of their jobs. Visit Tirupur in Tamil Nadu, Moradabad in Uttar Pradesh or Ludhiana in Punjab. You will hear innumerable stories of families that were once well off, but are today struggling to feed their children.
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| Paranjoy Guha Thakurta |
Politicians and economists used to talk about the virtues of a strong national currency. It was argued that the strength of a currency reflected the clout of a country’s economy, it's purchasing power and it's position in the comity of nations. These voices are no longer that loud. As the US greenback progressively weakens, the issue that is being hotly debated is whether the losses on account of the dollar depreciating are being compensated by the gains that accrue from the rupee strengthening. Simply put, India’s exports have become relatively more expensive while the country’s imports have become cheaper and it is not certain what the net gain is.
It is contended that since India imports more than it exports, the gains arising from a weak dollar are more than the losses that the country has to bear. True, the appreciation in the rupee has to an extent cushioned consumers here from the worst ravages of the rise in international prices of crude oil. Also, costs of manufacturing products like computers that have high import content have come down (even if the lower costs have not been passed on to consumers in many instances). But there’s another side to the story.
Union Commerce and Industry Minister Kamal Nath told Parliament on December 4 that 2 million people would become jobless in different export-oriented industries because of the dollar weakening. Although exports as a whole have grown, there has been a decline in exports of textiles, garments and leather. Other industries adversely impacted include processed agricultural products, handicrafts, sports goods, chemicals, engineering items and marine goods.
A survey conducted by a senior bureaucrat with the Commerce Ministry in July last year found that at least 200,000 jobs would be lost in garments and textiles, 80,000 in Tirupur alone, famous for its internationally-renowned hosiery manufacturing units. In just six leather making companies surveyed by the Ministry, profitability had crashed by three-quarters and nearly 2,000 workers rendered unemployed.
The problem essentially arises from the fact that on account of historical reasons, 70 per cent of India’s exports are denominated in US dollars. Many export-oriented industries operate in buyers’ markets where demand crashes when prices rise even a little. Two clear messages come through loud and clear. Exporters have to cut costs to remain internationally competitive. More importantly, invoicing patterns have to change. Exporters who have not been able to designate their transactions in euros, yen or even, rupees, are bound to suffer. If such exporters become truly competitive, they have to exert pressure on their buyers and convince them that invoicing patterns cannot remain frozen in time.
Exporters of computer software and information technology enabled services or firms engaged in business process outsourcing have also been adversely affected by the dollar’s fall. But the pain such firms are going through is limited compared to the devastation that has taken place in cities like Ludhiana (an important center for manufacturing sports goods that are exported) and Moradabad (famous for its brass handicrafts).
Many exporters were pampered in the past as India used to be acutely short of hard currency for nearly five decades. Successive governments emphasized export-promotion and import-substitution. The situation is now dramatically different. The country has more hard currency than it can use productively. Indians, who had hoarded dollars, have brought their illegal funds back.
In March last year, the Reserve Bank of India had stopped mopping up US dollars to keep the value of the rupee artificially low. Consequently, the rupee gained against the dollar by a huge 8.5 per cent in less than 40 working days in March and April. By the end of 2007, the rupee had gained roughly 15 per cent against the dollar over a 12-month period and its value had touched a peak in a decade. Between end-January and mid-February, the rupee lost roughly 3 per cent against the dollar. However, the broad trend has not been reversed. The appreciation of the rupee is part of a conscious official policy to contain inflation at a time when rising prices (especially food prices) have threatened to rapidly erode the popularity of the government in power.
The depreciation of the US dollar is not a temporary phenomenon. Indian enterprises have no choice but to live with this new reality.
The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.
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