Duty, rupee gain hit exports to China

The effect of rupee appreciation is being felt by engineering exporters acutely.

Engineering industry sources here pointed out that there had been a visible decline in the growth of engineering exports, specifically to China in the first half of the current fiscal.

Exporters were finding it difficult to match the figures of the last financial year when exports to China witnessed a growth of 77 per cent and were valued at $1.28 billion.

Exporters told Business Standard that they feared that the growth in exports to China could flatten out totally owing to rupee appreciation.

According to Ravi Sehgal, a leading exporter, the engineering export growth to China was down by 3-5 percent in the quarter ended in September 2007.

"In the quarter ended in June this year the growth was static but between July-September the growth rate declined by 3-5 percent," he said.

In addition to the rupee appreciation, Sehgal attributed the down slide to the increased freight rates for carrying engineering goods specially to South East Asia. "Besides rising Rupee, in the last couple of months the freight rates have doubled for the cargoes to Europe, Middle East and the South East Asia. This two factors have largely influenced the performance," he explained.

Regarding the overall performance of the engineering exports however, Seghal sounded optimistic to maintain the growth projections. Probably we would pull it off through USA and the Middle East markets. "In the US which is the main market, the freight rates are unchanged and in the Middle East we remain as the only supplier, so these two markets would do the balancing act," he said. Subsequently he added these predictions are subject to the assumption that there is no more change in the freight rates and a steady rupee at the current level.

However, according to Rakesh Shah, chairman of the Engineering Export Promotion Council (EEPC), this erosion was a cumulative effect of the levy of a new import duty by the Chinese government and the rupee appreciation. "Metals and steel were the main commodities in the export basket to China and the recent import duty also had an impact on performance," he added.

Shah stated that the overall growth in the engineering export would slow down by 50 per cent because of the appreciation of the rupee.

"The overall growth this year would be around 15 per cent in dollar terms and just 1 per cent in rupee terms, whereas exports grew by 33 per cent in dollar as well as rupee terms in the last fiscal," Shah added.

He also said he had based his estimates on the assumption that the rupee would not fall below Rs 40 to the US dollar. Shah said the only way to combat the slowdown was in-depth policy reform by the government.

"The government must make its intention clear and honour national commitments," he added.

The second quarter registered a growth of about 15 per cent in dollar terms, which is 3 per cent higher compared to the last quarter. "During the last year the average growth varied between 25-35 per cent in dollar terms and more importantly this figures were identical in terms of rupee, but this year so far as the trends are suggesting the growth in terms of rupee revenues would be around 1-2 per cent," said Shah.

Anupam Shah, another engineering goods exporter, warned that exports to the US would suffer further as rupee appreciation was leading to loss of competitiveness of Indian exports particularly against goods from China.

"The rupee has appreciated by 6.17 per cent against Chinese Yuan in the last six months and as a result China, our main competitor, is getting a clear cost advantage," he explained.

Engineering products export to the US registered a growth of 35 per cent last year.

This year, the industry expected lower growth of 15 per cent. "US is the largest importer and this year volume may increase but the rate of growth would suffer due to hardening of our currency," Shah said.

Shah added that the volatile movement of rupee had made it difficult for the exporters to book a forward price.

"There is hardly any forward premium - we get only 1 per cent annually now, whereas a year back we used to get around 7-8 per cent," he said.

The volume of engineering export to China in the last fiscal was $1323 billion which was a 70 jump compared to the previous fiscal.