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Done in by the dollar

It is clear that beyond a point, a strong rupee appreciating further against the US dollar may lead to domestic industrial turmoil, reports Gaurav Choudhury.

business Updated: Jan 28, 2008 23:17 IST
Gaurav Choudhury

Fears of further appreciation in the rupee in wake of US Federal Bank’s 0.75 percentage point cut in its benchmark rate last week has set the alarm bells ringing after surveys revealed telling statistics about India’s eroding export competitiveness.

“The most immediate concern arising out of a Fed rate cut would be that of sharply appreciating rupee. This would affect merchandise exports and invisible income could see a fall,” said TK Bhaumik, chief economist, Reliance Industries Limited.

The rupee has appreciated by about 12 per cent in 2007 forcing is currently trading at less Rs 40 to a dollar leading exports becoming costlier and less profitable.

Almost 70 per cent of India’s external trade is invoiced in dollars and any change in the exchange rate has an impact on India’s external sector.

A senior official, who did not wish to be identified, said it was imperative that further short-term measures are provided immediately.

“Industry and export associations have been reporting considerable loss in employment, especially in sectors such as textiles and handicrafts and this is also borne out by a survey carried out the Directorate General of Foreign Trade (DGFT),” the official said.

Trade analysts said small and medium exporters are feeling the pinch largely because they are unable to hedge currency fluctuations losses due to smaller volumes.

“Nearly four million people have already lost their jobs and if the government does not intervene the number could increase to eight million by March next,” Ganesh Gupta, president of Federation of Indian Exports Organisation (FIEO) said.

The $160 billion export target for 2007-08 appears increasingly unattainable in the wake of an erosion of earnings, although the government is optimistic still.

The government has already announced a slew of fiscal sops that included cheaper bank credit, increased rate of tax refunds and faster reimbursement claims. Export realisation have fallen by 12 per cent for chemicals, and between 6 and 6.5 per cent for textiles.

Exports are likely to decline by 20 to 25 per cent for processed food and agro products, electronics and electrical items and steel products, a study by the Federation of Indian Chambers of Commerce and Industry (FICCI) said.

A Commerce Ministry note says that textiles, garments, electronics, handicraft, machinery, bi-cycle, chemicals, processed foods, carpets, auto components and medical instruments are the sectors that constitute around 50 per cent of India’s total exports.

“Export prices of Indian products in these 11 sectors has become uncompetitive to the extent of 10 to 12 per cent on average vis-à-vis competing countries’ products due to rupee appreciation,” the note said.

Profitability has significantly fallen in most cases. In cases of some manufactured items of metals such as steel utensils, tableware and kitchenware, profitability has come down from 12.6 per cent to 1.6 per cent.

India's exports for the April-November period of the current fiscal stood at $ 98.38 billion, registering a growth of 22.08 per cent over the previous year.

A committee, set up to look into the impact of rising rupee on India’s export sector, will submit its report by January 31.