BOMBAY, February 15: If the Reserve Bank of India governor Bimal Jalan needs any evidence of how the propped-up rupee is strangling the country's exports, he need only look out through a rear window of the RBI building. The evidence is there at the empty Bombay docks, in the shadow of the RBI, or across the bay at the Jawaharlal Nehru Port Trust."It's pathetic. The export terminal is so empty you could play a football match on it," commented a freight forwarder, a breed of businessmen among the first to sniff sea-changes in trade flows.Ships are sailing short of cargo and stacked with empty containers. The price for carrying a cubic metre of cargo from Bombay to Singapore has sunk to $15.
Just a few months ago bigger shipping lines were clinging to a price of $25, but they have all come down, the forwarder said. The root cause lies in the dramatic fall in the values of south-east Asian currencies, which have made exports from those countries more competitive. Indonesia's rupiah lost more than 70 per centin seven months and the Singapore dollar 13 per cent, although those and other currencies have regained some of the lost ground recently.
The RBI has opted to defend the rupee from similar depreciation, thereby sacrificing exports and putting growth on hold, while India carries out an election beginning on Monday and which will end on March 7. The central bank has kept the rupee's depreciation to just eight per cent in the last seven months. It traded at around Rs 38 rupee to the US dollar on Friday.
Authorities were banking that recent signs of a recovery in south-east Asia would continue, and that foreign investors would welcome whatever new government emerges from the election. "I didn't think they'd be so concerned about the currency. My feeling is it's a political thing," said the managing director of a major American bank here.
The RBI wants to avoid a sudden currency shock that would push up inflation, hitting millions of Indians already living in poverty. Wholesale price index data releasedrecently showed annual inflation in the week ended January 24 at 5.81 per cent, down from 7.53 per cent at the same point a year earlier -- but the trend for the past few months has been creeping up.
But the rupee defence strategy poses dangers, too. "It is going to mess up the economy unless interest rates come down," the banker said. Real interest rates higher than the growth rate are a recipe for an increase in bad loans for banks -- the last thing needed when credit offtake is finally moving after months of delay. And if rates come down after the election, what will happen? "The currency will weaken," the banker concluded, reckoning it could fall to between 42 and 45 to the dollar.
His counterpart at another major foreign bank here was more alarmist, seeing a value between 45 and 50. Because of the rupee's strength relative to south-east Asian currencies, imports will flood in, he said. "The current account is going to deteriorate, domestic industry is going to suffer," he added. At around 1.5 percent of GDP the current account deficit is happily low, but unless foreign capital inflows revive, the deficit will worsen.
The US investment house Goldman Sachs and its Indian affiliate Kotak Securities polled American funds, and found a positive attitude toward the country but said regional funds were staying away.
"To them (regional funds), India appeared less attractive either because East Asia would go down dragging India with it, or because East Asia would bounce back leaving India in its wake." But the report's overall conclusion was positive because the US investment community had more global emerging market money at its disposal than dedicated regional funds.
Three months of net outflows by foreign portfolio investors from November through January had given India a jolt, after not having had one negative month since overseas investors started coming in five years ago. Total foreign institutional investors' holdings have comedown $200 million to $8.9 billion as of end-January.
The foreignbankers said the rupee's current level has given foreign funds an excuse to get out of India, and foreign direct investment for new projects will only recover when the mists over politics and the rupee begin to clear.
Last month the RBI jacked up interest rates decisively and throttled liquidity as the rupee weakened through 40 per dollar. Officials privately admit that scaremongering raised central bank fears that the rupee would be relegated to 45 or even 50 to the dollar if it did not rein in a runaway market. The dose of higher interest rates delivered in mid-January has worked and the rupee had held below 39.
If the cure for India's headaches was the drug paracetamol,for example, the country would probably opt for a Chinese version of the medicine. A kilogram of Chinese-made paracetamol costs around $2.50. A kilogram of Indian paracetamol costs $3.75. The Chinese product offers cost savings that are huge to the average poor Indian.
Daewoo Motors India Ltd recently announced sales of its Cielo carhad tripled in the past month following a 20 per cent price cut. The company, majority-owned by Daewoo Motor Co, imports 30 per cent of its car parts from South Korea.
The Korean won also has depreciated sharply in the past half-year. Daewoo Motor India expects to almost double its share of India's mid-sized car market to 43 per cent by the end of March. "How can Indian competitors respond to that?" asked one American banker. Trade data out last week showed India's December exports fell 5.1 per cent and imports rose 11.91 compared with December 1996.
The April-December trade deficit widened to $4.48 billion from $3.25 billion a year ago. But exports over the nine months have grown a meagre 3.31 per cent, down from 6.36 per cent growth over the same stretch in 1996/97 and 24.47 per cent growth in 1995/96.
The country is also facing big increases in imports of cotton, which has proven cheaper on the international market than at home. The former RBI governor Chakravarty Rangarajan replaced by Jalan inNovember, had nurtured hopes that slowing growth would be pepped up by exporters benefiting from expanding world trade.
But Rangarajan left just before the exporters' screams began hitting the high notes. The exporters were likely to survive the exchange rate mugging by selling high-value products which were bound for foreign markets at cheap prices domestically. But economic growth is likely to continue slowing.
Analysts already doubt official forecasts of 6 per cent growth in gross domestic product this fiscal year (ending March 31) after 7.5 per cent growth in 1996/97. "1998/99 Will be below 1997/98," said an American banker.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
