MUMBAI
- Lumbering to limit the rupee's growing muscles
from damaging India's export business, the
government has announced a much-awaited US$345
million relief package for worried exporters. The
rupee has been averaging a 9.6% climb against the
US currency since January, making Indian exports
more expensive and less competitive in global
markets.
A record $44.9 billion worth
foreign-exchange assets flowed into India this
year, up from $23.4 billion in 2006. This
contributed to
the
cheaper dollar fetching fewer rupees and punched
big holes in exporters' profits.
As this
article was written, the exchange rate was Rs40.41
to US$1, compared with an average of Rs45 this
decade. Thailand is another Asian country facing a
similar problem, where a strengthening baht is
expected to shrink its exports by 12.49% in the
second half of this year.
The rising rupee
has caught global attention, and Time magazine
termed the Indian currency's appreciation "one of
this year's biggest business stories".
The
Indian government's export-relief package includes
increasing drawback rates on most existing export
items eligible for this concession, increasing the
list of export items eligible for duty drawback,
and banks offering shipment credit on easier terms
for small and large exporters.
India's
most frequently exported items include textiles,
food products from snacks to tea, engineering
products, garments, marine products, automobiles,
leather goods, sports equipment and, of course,
the software and outsourcing-service industries.
The textile industry is one of the worst
victims of the rising-rupee story, with exporters
to the US suffering losses ranging from 23% to
more than 70% because of the dollar exchange rate
dipping. Indian exports to the US totaled $22
billion last fiscal year, compared with the $288
billion worth of China-US exports. India also
fears losing more than a quarter-million jobs
because of fewer export orders, mostly in the
textile industry.
The $1.5 billion Indian
tea industry, the largest tea producer in the
world, also took a hammering, with exports already
falling behind this year by 5 million tonnes
compared with last year.
The relief
package hasn't come too soon, as more optimistic
analysts expect the dollar to sink deeper against
the rupee. Forex assets are expected to rise to
$60 billion, taking India's total foreign-currency
holdings to a record $260 billion.
Those
gleefully cheering the rising rupee are importers
and the tourism industry. Indeed, this crisis of
plenty could be deeply ironic for those who
remember India's desperate
foreign-exchange-reserves situation in 1991, when
the government ignominiously had to sell 20 tonnes
of its gold holdings for $200 million to pay for
imports.
When now-Prime Minister Manmohan
Singh entered the cabinet as finance minister in
1991 and opened India's economy to the world, its
forex holdings were $495 million, barely enough to
finance imports for a fortnight. Sixteen years
later, India has $218 billion in foreign-exchange
holdings and worries what to do with it.
Export trade associations have cautiously
welcomed the new governmental relief package, but
most have appreciated the good intentions more
than the actual content. Ganesh Kumar Gupta,
president of the Federation of Indian Export
Organizations, said the duty drawback rates should
have been increased by an additional 5%. The
hard-hit members of the Synthetic and Rayon
Textiles Export Promotion Council agreed.
Exporters also sought more sales-tax
concessions. The prevailing sentiment was that the
government's move was a stopgap measure, and that
the regulatory Reserve Bank of India would have to
be more adroit in managing the increasing forex
inflows. The RBI has already purchased $24 billion
in US currency this year to keep the rupee in
check.
Finance Secretary D Subbarao said
he hopes the new sops will ease the way to reach
the $160 billion export target for the current
fiscal year, and added that the drop in exports
cannot be fully blamed on the rising rupee.
A recent report by the Federation of
Indian Chambers of Commerce and Industry agreed
with him. It said inadequate port and shipping
facilities are among the biggest roadblocks to
India achieving the current export target and the
$200 billion export target for next year.
Local analysts say another long-term
solution is to usher in capital account
convertibility (CAC, or freedom to convert local
financial assets into foreign financial assets,
and vice versa, at market rates). Finance Minister
P Chidambaram told the India-Europe Investment
Forum in London this month - the European Union is
India's biggest investor, contributing 25% of
foreign direct investment in the country - that
India is gradually moving toward CAC.
"There is de facto full capital account
convertibility for non-residents: they can bring
in their money and they can take out their money,"
Chidambaram said, and pointed out that foreign
investors too can bring in capital and take home
their profits, dividends, capital, capital gains
and royalties.
For now, more foreign
investors largely mean bad news for India's
exporters.
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