Strong rupee, weak exporters

Effects on job-generating sectors should worry govt

After several consecutive years of depreciation against the US dollar, the rupee has strengthened solidly over the course of this calendar year. It has gained about 6 per cent against the dollar in just six months. One major contributor to this trend is a surge in foreign capital inflows, particularly into the domestic debt market. Foreign holdings of rupee-denominated debt have increased by about $22 billion this year. But Indian exports have been hit hard by the appreciation of the rupee. As a four-part series of reports in this paper has shown, major export-oriented sectors are struggling to deal with the reduced margins produced by a business model in which costs are in rupees and revenues largely in dollars.

Perhaps most worrying from the point of view of employment and jobs is the effect on labour-intensive sectors such as textiles and leather. The textile and apparels sector exports about $50 billion worth of goods, of which $17 billion comes from finished clothes. The sector works on particularly narrow margins, of about 2 to 4 per cent. The average export rate for an individual garment is less than $3, and more than half of export revenue is denominated in dollars. The consequence is that, to stay profitable, companies are being forced to increase prices, sometimes by as much as 4 per cent, though that is still less than is needed to stay at the same level of profits. But this means that Indian exports will lose market share to those from countries like Bangladesh, where the currency has been depreciating against the dollar; companies there can afford to make their exports cheaper and more competitive in dollar terms. A similar pattern is visible in other sectors such as leather, pharmaceuticals and information technology, though the larger technology firms can at least access hedging strategies that moderate their currency risk.

The effect of the rupee’s strength on exports is a reminder that prices matter. Export pessimists tend to argue that the currency’s value has little effect on the ability to export, which is determined by other structural factors. Exporters’ current experience is just another reminder of the weaknesses of this view of the economy. The question thus arises: What is to be done about it? On the one hand, India can decide to do nothing — focus on developing the domestic market and let exports sort themselves out. But this risks further destabilising employment-generating sectors such as textiles and apparel, which are already suffering from disruptions caused by demonetisation and the introduction of the goods and services tax. The problem cannot just be ignored. Can the government choke off foreign inflows and thus stabilise the currency? Foreign holdings are already bumping up against domestic regulatory caps in spite of a slowdown in commercial bank lending to companies that has caused them to turn to the debt market. The authorities should consider the effect on the currency before easing caps on foreign purchases of domestic commercial debt. The central bank has room to step up its purchases of dollars as well. And finally, the most far-sighted and sustainable way to increase exports is to reduce domestic costs to exporters. The government must work harder on increasing the ease of doing business in India.