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India’s dollar dreams in peril

India’s exports face an uncertain future in wake of a persistently rising rupee and an uncertain world economic environment, reports Gaurav Choudhury.

business Updated: Mar 25, 2008 00:55 IST
Gaurav Choudhury

The near recessionary tendencies in the United States has set alarm bells ringing in emerging markets including India where falling a dollar, low export earnings and widening trade deficit have begun to pinch.

The International Monetary Fund projects global growth to slow from an estimated 4.9 per cent in 2007 to 4.1 per cent in 2008.

India’s exports face an uncertain future in wake of a persistently rising rupee and an uncertain world economic environment, making it imperative for the government to offer more fiscal and monetary relief is provided to beleagured exporters.

“The outlook for exports in 2008-09 may not be as bright as in the past few years with lower projections in world GDP and world imports and exchange rate developments,” the pre-budget economic survey said.

India's exports totalled $ 111 billion dollars in April-December 2007.

The rupee has appreciated by 12 per cent in 2007 and is currently trading at less Rs 40 to a dollar leading exports becoming costlier and less profitable. The appreciation in substantial measure was on account of weaknesses in the US economy that hit the dollar, in addition to local factors.

The rupee’s appreciation against the dollar is significant as almost 70 per cent of India’s external trade is invoiced in US dollars, forcing many to believe that the export target of $160 billion for the year that ends on March 31 is unlikely to be met.

Also, sectors like software depend heavily on demand from the US. If there is a recession in the US, it could lead to a cutback in purchases, although lower costs in India could bring the buyers back as they will try to keep costs low on a long-term basis.

Though exports to the US have already been slowing in 2006 and 2007, a further slowdown may be unavoidable. “The slower Indian economic growth in 2007-08, relative to 2005-06 and 2006-07, may also have a temporary dampening effect on capital inflows,” the survey said.The stock market has been booming away in India for the past four years, but the “sub-prime” crisis has hit US-based foreign institutional investors (FIIs), eroding both the funds available to invest and the sentiment that sustains investments.

A report by HSBC, however, exuded confidence this month that emerging economies would be able to tide over the crisis.

“The confidence in emerging market economies’ ability to forge ahead in the backdrop of a US recession emerges from the insular nature of many such countries and the domestic strengths they enjoy. India figures prominently with its strong domestically driven growth pattern,” it said.

India and other Asian economies have been at the centre of an animated debate worldwide on whether there is a “decoupling” of the continent’s growth trend from the US recession. In an inter-connected world, both capital flows and demand in Asia are linked to US growth, but there is a clear opinion among many that the degree of it may not be as high as some fear.

That could be a silver lining for India in the event of a US recession. When the dust settles, even if India’s growth rate slows down, it might weigh favourably against growth rates in many other countries.

However, there is a domestic slowdown in industry as well and this may be independent of the US recession. High oil prices have not been passed on to Indian consumers, and this has left an undercurrent of inflation in addition to visible inflation in the economy.

India’s gross domestic product (GDP) grew by 8.4 per cent in the October-December quarter of 2007-08, down from the previous quarter’s 8.9 per cent raising concerns about a possible slowdown in the economy.

With inflation on the higher side, cutting interest rates to boost growth is no longer an easy option.

“High oil prices will surely have an inflationary pressure, more so in unregulated products such as aviation turbine fuel. Moreover, the import bill will go up and widen the trade deficit,” said DK Joshi, Principal Economist of credit rating and consulting firm Crisil.