The rupee has depreciated just 0.8% against the euro in March, while it has, in fact, appreciated against the pound, which will negate the currency advantage proportionately.
As the coronavirus cases jump in the EU and the US, India’s top two outbound shipment destinations, exporters of both goods and services see their fortune plummet in FY21, despite a depreciating rupee.
While the rupee has weakened by almost 4% against the greenback in March, the currencies of competitors such as Indonesia and Malaysia have depreciated at a sharper pace, by over 11% and 5%, respectively. In software services exports, roughly 28% of payments are made in currencies other than the dollar.
Although the Bangladeshi rupee has held steady and Vietnam’s currency has weakened only less than 1% against the dollar in March, they enjoy much greater cost advantage than India in labour and logistics. Also, Bangladesh has duty-free access to the US and the EU markets in garments, while Vietnam, with its attractive incentives, has already emerged as a major electronics export hub, leaving India far behind.
The US, the EU and China made up for 40% of India’s merchandise exports. Importantly, as the pandemic has forced lockdown in key cities in the EU and the US, services exports, too, have got a hit. The US (and Canada) and Europe made up for 61.2% and 25.6%, respectively, of India’s software services exports worth $118 billion in FY19, according to a recent Reserve Bank of India (RBI) report.
Interestingly, the euro made up for 9.6% of India’s software services export payments in FY19, while the pound 6.7%. The rupee has depreciated just 0.8% against the euro in March, while it has, in fact, appreciated against the pound, which will negate the currency advantage proportionately. Of course, the dollar still is the preferred currency, with a 72% share.
However, the much bigger worry for exporters is the potentially massive demand slowdown due to the pandemic. In such a case, the currency relief is hardly any solace, they stress. Ravi Sehgal, chairman of the engineering exporters’ body, EEPC, said: “A sharp rise in the dollar value due to a flight of capital into safe assets would be of no benefit to our exporters,” as hardly any exports are taking place.
The exporters that FE spoke to had last week warned of a 10-15% drop in merchandise exports in FY21 if the situation persisted until the first half of the next fiscal. The decline may be more pronounced if the situation worsens, they warn now.
Global supply chain has been hit hard, cargo movement has been affected, shipping lines altered and warehouse capacity stretched, they say.
Ferro alloys, steel, automobiles exporters have reported a halt in shipments, according to EEPC’s Sehgal. “In the face of continuing uncertainty as to how long the global crisis would last, no fresh orders are forthcoming and even if some odd enquiries are made, prices being quoted are very low.” Engineering goods are the largest segment, making up for over a quarter of the country’s export basket.
According to Phamaceuticals Export Promotion Council director general Udaya Bhaskar, several consignments of exporters are getting held up at ports. The US makes up for over a fourth of India’s pharma exports. Up to February this fiscal, pharma exports grew by 10.8% year-on-year, when overall goods exports contracted by 1.5% to $293 billion. Analysts say goods exports this fiscal may fall to around $320 billion, against $330 billion in the previous year.
Already, as many as 58% of the 103 respondents in a survey by CARE Ratings suggest exports will contract in FY21 following the covid-19 outbreak, with sectors such as tourism, aviation, auto, electronics and metals facing the maximum risk. The Federation of Indian Export Organisations (FIEO) has already projected a $5-billion loss in earnings from foreign tourist arrivals in 2020 following travel bans imposed by India and others.
FIEO president Sharad Kumar Saraf said: “The MSMEs particularly in employment intensive sectors like carpets, handicrafts, apparels, footwear, gems and jewellery, marine and perishable with their major market in Europe and the USA are likely to be worst affected particularly in first quarter of FY21, as per the current trend.”
Lack of adequate credit flow to exporters remains a sticky issue. Export credit contracted almost 23% y-o-y as of January 31, even though overall priority-sector lending rose 4%.
Meanwhile, both the World Trade Organization and the IMF have said global goods growth will remain weak in 2020, mirroring the broader slide in economic growth.