Curb foreign currency inflows

EXIM MATTERS

The turmoil in the financial markets is taking its toll on manufacturers. They feel that no matter how well they run their businesses, it is the speculators in the financial markets and policy makers at top levels who will determine their fate.

The decision of the Reserve Bank not to lower interest rates and the decision of the US Federal Reserve to lower rates by 1.25 per cent have widened the interest rate differentials, giving cause to anxiety that more money will flow into India because of arbitrage opportunities to borrow cheap money in the US and invest in India. Such inflows could further strengthen the rupee, making imports cheaper and exports costlier.

The Reserve Bank has put caps on investing in bonds and restrictions on ECBs. Also, the cost of borrowing abroad has gone up, as lenders have become more risk-averse after the sub-prime crisis. However, there is nothing to stop the importers from buying goods with longer credit periods.

From the importers' point of view, longer the credit period the better it is, because, for one, the interest rate abroad is lower and second, the prospect of the strengthening rupee would mean lesser payout of rupees after some time. This would also mean that there would be less demand for dollars in the short run from importers "" something that can strengthen the rupee further.

The exporters would like to take pre-shipment and post-shipment credit in foreign currency at lower interest rates because, at the annualised forward premium of less than 2 per cent, the rupee loans, even at concessional rates, are costlier. However, the banks are less willing to lend in foreign currency to exporters as the sources of funds "" the deposits from non-resident Indians "" are strained and also, they have enough rupee resources to lend.

The Reserve Bank has clearly said that curbing inflation will be its top priority and has even issued fresh bonds to suck out liquidity in the money markets. It should open up more avenues to enable banks lend to exporters in foreign currency.

In the Budget, the Finance Minister should resist the temptation to win applause by cutting import duties. Any customs duty rate cuts, other than those warranted by way of rationalisation, accompanied by a strengthening rupee, would make imports even cheaper and severely impact manufacturers. That would, in turn, result in job losses "" something that the Government does not want.

The Government needs to sustain economic growth. The fall in export growth rate to 16 per cent in foreign currency terms and 2.5 per cent in rupee terms is a call for pro-active steps. Unbridled imports can leave capacities under-utilised and retard growth.

So, rather than strive to cut import duties, the Finance Minister should look at innovative ways to curb foreign currency inflows and find ways to reimburse or exempt burden of indirect taxes on the exporters.

He should find simpler ways to exempt service tax burden on exports and announce continuation of income tax exemption for export oriented units, software technology park units, electronic hardware technology park units and biotechnology park units.

tncr@sify.com