Free fall helps but Indian exports need more than just a cheap Re

Sep 11 2013, 11:01 IST
Comments 0
SummaryThe upside of the rupee's slump is an export boom that sets the economy straight, right? Wrong.

The upside of the rupee's slump is an export boom that sets the economy straight, right? Wrong.

Prime Minister Manmohan Singh echoed classical economic theory when he told Parliament last month that the plunging rupee, which has lost 18% against the dollar since selling pressure picked up in May, would spur exports and discourage imports.

Some industries are bracing for a depreciation bonanza and exports are already climbing.

They rose at a double-digit pace over a year earlier in the last two months, but for a hosts of reasons, Asia's third-largest economy is unlikely to see the sort of sustained export-led revival that nursed the Tiger economies to the east back to health after the 1997 crisis decimated their currencies.

A multitude of stumbling blocks mean that exporters, from farmers to factory owners, are ill-placed to reap the benefits of the rupee's slide: bad news for policymakers and investors looking for a silver lining in India's worst economic slump in 20 years. These hurdles range from erratic taxes throttling special export zones to a cash crunch and clogged ports.

"Notwithstanding the rupee depreciation, relatively high inflation and infrastructural deficits continue to raise the costs of production and constrain the ramping-up of exports," said Aditi Nayar, an economist at the rating agency ICRA, an arm of the Credit Rating Agency Moody's Investors Service.

"With only a moderate improvement in demand conditions in key destinations such as the US and Europe over the last six months, foreign buyers will attempt to squeeze the margins being earned by Indian exporters," she said.

To make things worse, a dependence on imports for 80% of India's oil needs plus a growing chunk of the coal keeping the lights on will limit the cheaper rupee's ability to reduce the world's third-largest current account deficit.

Imports weigh heavily on Indian exporters too.

Take the country's two main exports, petrochemical products and jewellery, which together accounted for nearly a quarter of India's $450 billion overseas sales last year. They are mostly made with oil and gold, India's top two imports, which also cost more now because of the rupee's diminished purchasing power.

Manufacturing suffers for the same reason: parts used in Indian car plants and factories assembling electronics largely come from overseas, pressuring margins when the rupee drops.

Hyundai Motor, the country's leading car exporter, is bracing for some price pain. Its finance and corporate affairs director, R Sethuraman, told Reuters the rupee would not help exports for

Single Page Format
Ads by Google

More from Economy

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...