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Monday, August 6, 2007

India Inc’s import intensity of exports slides as rupee rises

Indian policymakers are facing a new dilemma. The rupee has been appreciating sharply against the dollar — it has appreciated by 11% since August last year — something they did not experience often in the past. A huge current account deficit in the US and steady capital inflows are expected to strengthen the rupee further in the coming months.

The appreciation of rupee, of course, has come as no surprise. The mounting foreign exchange reserves over the years always had the potential for a stronger rupee and it was the intervention of the central bank that kept it from a dramatic rise. But even the central bank now finds it difficult to restrict the forward march of rupee.

The question is: How will the appreciation of the rupee affect our economy? The immediate impact will be on our exports, economists argue. And if in terms of volume, exports do not suffer significantly in the short run, earnings will decline due to lower realisation in rupee terms. This is reflected in the fall in export growth in the current year. Exports have grown 18.1% in the first quarter against 28% targeted for the whole year.

Exporters attribute the dip in growth rate to the appreciating rupee and have warned that the poor realisations due to appreciation of rupee is impacting their competitiveness, forcing them to cut down on their order bookings.The strengthening of rupee, however, has a brighter side too. As imported goods become cheaper and global competition gets intensified, corporate India will be pressurised to raise productivity. This will benefit the domestic consumers as not only the imported goods will be cheaper but the domestic manufacturers too will be compelled to cut prices to retain their market shares.

But that will be in the future. For the present, Indian companies seem to suffer heavily from rupee appreciation as import intensity of exports is falling. An ET survey of 150 large companies finds that their import intensity of exports, measured as number of times imports as percentage of sales over exports as percentage of sales, has declined from an already low 0.87 in 2005-06 to 0.83 in 2006-07.

What is significant is that the fall in import intensity of exports during this period was largely due to higher shares of exports in sales and not because of rise in the share of imports in sales. That is, although the companies will lose in export earnings due to appreciation of rupee, they will not benefit the same way from imports.

The share of imports in sales has nearly stagnated at around 24% — up by only 0.6 percentage points from 23.7% in 2005-06 to 24.3% in 2006-07. The share of exports in sales at the other end has increased by more than two percentage points during this period from 27.4% to 29.5%. A stronger rupee is now feared to change the equation.

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