Rising rupee sees pressure for export support

With the rupee expected to continue strengthening in the short term, a demand for further tariff support to select sectors has risen.

"The worst is still to come. With the currency appreciating at a fast clip, while those of major competitors steadily go down, competitiveness of Indian goods will go down," says Ajay Sahai, director-general of the Federation of Indian Export Organisations.

Major exporting sectors such as engineering products, readymade goods and automobiles are expected to come under the pressure of reduced earnings and potential drops in orders.

It doesn't help that these major foreign exchange earners are also price-sensitive. They need to be given support, Sahai argues.

However, with the Merchandise Exports from India Scheme covering nearly 8,000 product categories, chances of further support are slim. Under this scheme, the government provides duty benefits to exporters at two per cent, three per cent and five per cent, depending on the product and country exported to.

"The scheme has already been widened last year, in September and November. We are not looking at an expansion soon." a senior commerce ministry official said.

The rupee has risen in value by more than five per cent since January against the dollar. It closed at 64.57 on Wednesday. A weaker currency is an advantage for export; it makes import, foreign travel and education more expensive.

"If current conditions persist, the benefits emerging from the textile (support) package will be lost within the next two months," said Rahul Mehta, president of the Clothing Manufacturers Association of India.

T S Bhasin, chairman of the Engineering Exports Promotion Council, says the rupee is certainly over-valued, as the current rally in the stock markets is liquidity-driven and not backed by domestic corporate earnings.

Economists have predicted a further strengthening, owing to rising investor confidence in India. "India is a net importer and a stronger rupee will help in reducing trade deficits, as well as keep domestic inflation in check. The focus should be on specific sectoral interventions," says Devendra Pant, chief economist at India Ratings.

The rupee has gained steadily in recent weeks as foreign portfolio investors have pumped money into the stock and bond markets, amid improving growth prospects.

"Forex reserves have increased by almost $10 billion between end-January and end-March," says a report from rating agency ICRA.

The country rose by one spot to eighth rank in the 2017 AT Kearney Foreign Direct Investment Confidence Index, where investors had favourable responses on current governance and regulatory issues.

In the past few days, the government has taken measures towards depoliticising of rail freight and passenger fares, listing of state-owned enterprises, introducing a dynamic pricing of petrol and diesel, and on a new schedule to control the fiscal deficit.

Commerce and industry Minister Nirmala Sitharaman had recently suggested the focus be on better infrastructure and reduced logistics cost, rather than on the currency exchange rate where boosting of export was concerned. Adding that low labour costs allowed Indian exporters a relative advantage.

The World Trade Organization has pegged higher growth in 2017 at 2.4 per cent, up from the tepid 1.3 per cent in 2016.

India's merchandise exports grew 27.6 per cent in March, the final month of the 2016-17 financial year, the steepest rise in a little over five years. However, this failed to help outbound shipment cross $300 bn in FY17, for a second straight year. Exports were $305 bn in 2011-12 and remained a little over $300 bn in the next three years. And, declined to $269 bn in 2015-16.

Source: Business Standard
Added On: 2017-04-20