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Sunday, December 16, 2007

Fall and rise of the rupee

A dollar in the 1970s cost Rs 7.50 and for the next three decades the rupee continued to decline. The rupee depreciated to touch Rs 49 to a dollar in mid-2002, and then appreciated till it breached the 40-mark in September 2007.

Recently, the Finance Minister, Mr P. Chidambaram, speaking at the Peterson Institute of International Economics in the US said, “The depreciation in the value of the dollar versus the rupee has thrown up unexpected downside risks and (although) the level of appreciation of the rupee was well beyond comfort levels…that is something we have to live with and our exporters will have to learn to live with it.”

In a relatively free market economy, a currency reflects the inherent strength of the economy and the stronger rupee in many ways reflects this aspect. An exchange rate depends on a number of complex factors — trade deficit, foreign exchange inflows, interest rates, currency reserves, etc.

A balancing act


The Reserve Bank of India would need to control both inflation and foreign investment flows (that is, match inflow with outflow of dollars).

In July, the Government announced an export relief package of Rs 1,400 crore for a number of industries , but trade bodies are asking for more. They want the RBI to intervene to stabilise the exchange rate, at least for the short term. In one of the world’s fastest growing economies, this can be done only to an extent.

Various interest groups want the Government to act in a certain way, but the latter should act in the best interest of the nation.

Where do we stand?


But are we better off with a weaker rupee? A rising currency has both pros and cons — some enterprises gain and others do not. Companies with revenue models that have earnings in dollars but costs in rupees are the worst hit. The IT and BPO sectors have clearly been hit, with profits falling due to lower realisation in rupee term of the billable hours denominated in dollars and salary costs in rupees showing no trend of buckling down.

Other export industries, too, face similar challenges, especially the SME (small and medium enterprise) segment which operates at low margins and employs nearly 20 million people. As the rupee keeps rising, profits of such enterprises evaporate and the prospect of loss of jobs looms large. Outsourcing is based on complex geopolitical factors that come into play in the country exporting jobs.

Every outsourcing or import is potentially a loss of job in the country that imports. Global trade will never happen if countries only protected jobs of people who support export-related activities.

It is now common knowledge that for every job in the IT and ITeS sector, four new jobs are created in other sectors of the economy such as recruitment agency service, airlines, hospitality, etc., which are also called “dollar dependent businesses”. As the margins of the principal fall, the service providers get squeezed harder. The pain of loss of margins gets passed down the line.

Countries make the decision to import or outsource from another country mostly for reasons of lower price. However, a job often goes to a place simply because of the unbeatable combination of price and quality. A pure cost advantage does not last forever. The loss of profits is not solely because of the rupee rising, which is a macroeconomic factor; rising costs of inputs, such as on salaries, take away the cost arbitrage on a more permanent basis.

Indian companies will benefit more through the creation of freight corridors, power reforms and improvements in infrastructure. These would help reduce the overall cost of inputs and make businesses more competitive. But, currently, exporters, in general, looking to the Government to provide relief.

The rupee is rising against the dollar, and the US economy is currently not riding its best phase.

The rupee has, however, not risen significantly against other major currencies. In fact, the euro and the pound have appreciated against the rupee in recent times.

Focussing mainly on the US markets and the dollar is detrimental for Indian businesses in the long run. And like other Asian economies, Indian businesses need to diversify their risks.

Impact of a rising rupee


It depends on where you are. Imports of crude (at 30 per cent of total imports is the biggest item on the import bill), machinery (17.2 per cent of total), electronic goods (8.4 per cent), gold and silver (7.7 per cent), etc., become cheaper.

These are big ticket expenditures for the country and capable of generating huge savings, but do not stir up emotions such as potential job and revenue losses of the export sector and, hence, does not capture popular imagination. Travelling abroad and investments by Indian residents in dollars become more attractive.

IT and other companies in a globally competitive situation have been able to make large acquisitions of US companies and, at the current exchange rates, any drop would entail substantial savings. Tata’s $8 billion acquisition of Corus or Hindalco’s recent $6 billion acquisition of Novellis would have a lower cost of acquisition from an Indian shareholders’ side due to the current exchange rates.

The deputy chairman of the Planning Commission, Dr Montek Singh Ahluwalia, believes that the Reserve Bank of India and the Finance Ministry face a difficult set of choices.

In a recent interview, he said that this is a balancing act that the Reserve Bank and the Finance Ministry have to play. It is a reflection mainly of the trilemma that economists face; you can only have two out of three things.

If you want to have a stable currency, an independent monetary policy and capital account convertibility, you can’t have all three. You have to give up one. This is the classical trilemma and the multiplicity of choices!

As the Indian economy continues to mature and as Indian businesses gain confidence to do business globally, nuances of risks associated with a fluctuating currency have to be better understood and tackled in a holistic way and factored in as only another business risk. In other words, core strength of businesses has to be expanded from just cost-competitiveness.

Meanwhile, let us toast the rising rupee as a symbol of resurgent India.

King of Fruits may sport a royal price tag this year

PUNE: Those who savoured juicy Alphonso mangoes this season at cheaper rates will have to shell out more in the next season as the King of Fruits is likely to make a delayed entry. Mango trees in the Konkan belt have just started to blossom, signalling a delayed crop. The first batch of mangoes is expected to arrive in April as against the February-March period, every year. This is likely to also hurt mango growers as exports to large markets such as Japan and the US, which opened last year, may not serve fully, said farmers.

American and Japanese governments had banned the import of Indian mangoes on concerns that diseases through fruit flies, that typically infest the fruit, may spread to those countries. Last year, Japan lifted the ban on mango imports on condition that the fruits will be subject to a vapour heat treatment (VHT).

The US also opened its markets to Indian mangoes with a mandatory irradiation treatment, after special teams from both countries inspected the treatment facilities in Maharashtra. India exports only the Alphonso and Kesar varieties of mangoes. Alphonso mangoes are mainly grown in the Konkan region, especially in Ratnagiri and Sindhudurga districts. According to the Maharashtra State Agricultural Marketing Board (MSAMB), which is also involved in the export of mangoes, around 2.93 lakh tonnes are grown over 346,538 acres of land.

Both districts have been declared as agri-export zones. Devgad village in Sindhudurga district produces one of the world’s biggest alphonso mangoes, about 50,000 tonnes every year. But ironically, the region does not have treatment plants necessary to export to the US and Japan.

The VHT facility is located at Vashi in Navi Mumbai, while the irradiation treatment plant is based at Lasalgaon in Nasik, both of them about 400 to 700 km far from the Alphonso-producing areas. Marathwada leads the production of the Kesar variety, with around 133,635 tonnes of mangoes grown on 85,323 acres of land . Though this region is closer to the irradiation facility, the VHT plant is almost 350 km away.

Despite the lifting of export bans, mango farmers from Konkan are grappling with political and bureaucratic problems which have been slowing their efforts. Their demands for a minimum support price for mangoes used in the processing sector, on the lines of sugarcane, have not been met. “Though exports to Japan and the US were allowed last year, farmers weren’t able to export their produce and we have dim hopes that we will be able to export this year either,” said Sudhir Joshi, president of the Devgad Mango Growers’ Association. “Inspite of the fact that our region is an agri-export zone, we do not have VHT and irradiation facilities in our region.

We have been demanding these facilities for a long time. The agriculture marketing board has provided us with cold storage and other packing facilities, but they are not sufficient for exports. We also need a laboratory for testing the quality of soil, fertilisers, pesticides, etc, which is a mandatory requirement for exports”.

Indian cotton import proposal to be submitted in ECC

KARACHI: Caretaker Commerce Minister Shahzada Alam Monnoo said on Saturday that proposal for allowing import of normal cotton from India via Wagah Border would be submitted in the next meeting of Economic Coordination Committee (ECC).

Addressing the members of Federation of Pakistan Chamber of Commerce and Industry (FPCCI), he said that textile industry was facing shortage of cotton and the government was makeing every effort to facilitate the availability of this vital raw material for the local industry. He said textile was the major industry and the largest export item and needed special attention. "The government will take every possible measure to provide support to the industry", he added. He further said that prices of oil, electricity and gas were beyond government's control but it could look at the mark up rates of the banks for textile sector.

He said the government had adopted a five-prong strategy to boost country's export. Referring to the ambitious export target of $45 billion for next six years, he said this would be met despite all the present challenges being faced by the country.