Small exporters feel the pain as Indian rupee slides to an all-time low

Weaker currency makes some customers to demand benefits or discounts, rue exporters

The Indian rupee sliding to an all-time low is often considered a boon for India’s exports. Smaller exporters have a different story to share.

Agra-based leather footwear exporter Gopal Gupta who has been grappling with challenges and uncertainty fuelled by the Russia-Ukraine conflict that has resulted in high logistics costs, has cancelled orders. A weaker local currency has also led to higher import costs and shrinking margins over the last three months.

“The fact that a weaker currency bodes well for exports doesn’t apply to all. When the rupee depreciates, our customers demand benefits or discounts,” said Gupta.

“Right now, our import cost has gone up. We import items such as insole board, PU lining material, among others. Similarly, prices of adhesives, dyes, and solvents have also been increased by our local suppliers. So when import or raw material costs go up, and if our product's price doesn't change, our margins shrink.”

Gupta is not the only one. As the rupee continues to depreciate against the dollar, industry association officials, along with engineering and footwear exporters, said that small exporters will be adversely affected if the currency continues to remain volatile or further weakens.

A weaker currency can support only certain exports in the short run and benefit only some exporters, said industry officials. An exporter, speaking on condition of anonymity, said the main challenge is to ascertain what the value of the rupee will be in the next few months, as payments are made at a later date.

“We normally have to take a forward cover – predict the value of the rupee vis-a-vis the dollar, which is going to be something different from what it is right now. If an exporter takes a forward cover, assuming that the rupee will be Rs 80 per dollar in six months but it so happens that changes in the economy bring it up to Rs 73 per dollar, then exporters lose a lot,” said the exporter,  adding that small exporters don’t have the wherewithal to take such losses.

The rupee closed at 77.6 on Friday amid rising global crude oil prices.

Last week, Brent crude oil rose more than 6 per cent to $115 per barrel, exacerbating the concerns of a wider current account deficit, as oil imports comprise the lion’s share of India’s overall import basket.

Geopolitical tensions arising from Russia’s invasion of Ukraine have resulted in a surge in global commodity prices and put pressure on the domestic currency.

Pradeep Multani, president, PHD Chamber of Commerce and Industry, said that although large industries tend to benefit from currency depreciation in the short term, in the longer run, it will benefit no one.  

“Small and medium enterprises are not highly connected with the global value chains and the decisions taken during the high currency volatility may lead to vulnerable results in the future,” said Multani.

Amid rising commodity prices, the cost of imported raw materials are affecting exporters’ margins. Exporters of traditional sector goods such as textiles and leather may still benefit, but import-intensive products such as electronics, automobiles, organic chemicals and pharmaceuticals, among others, will face increased prices.

“Going ahead, rupee stability is needed for export growth,” said Multani.

According to Aditi Nayar, chief economist at ICRA, with broader trends globally and expectations from the Federal Reserve, the rupee, like many emerging market currencies, has a depreciating bias against the dollar going forward.

However, a weaker currency may not result in significant gains for exports. Firstly, global trade volume may not be as robust in the current fiscal due to muted demand. Secondly, other competitive currencies are also depreciating against the dollar, which will not give any competitive advantage to exports, said Nayar.

“Demand will be more back on in the year. If the Russia-Ukraine war de-escalates and commodity prices ease, it may offset the rise in demand in the second half,” added Nayar.

Indian exports remained resilient throughout 2021-22. The government last year had also set an ambitious $400 billion target for exports. Not only was the target met, it was exceeded.