Double digit inflation may impact export growth

 Labour intensive traditional sectors like handicrafts, textiles, leather, marine products, agro processing, toys, sports goods and low value engineering products, which account for 60 per cent of the Indian export basket, are likely to be the worst hit if the headline inflation rate continues its northward trend.

 "Traditional sectors  source their raw material from within the country and employ a large number of people. If the inflation rate continues to be in this range, the Indian exporters will loose their competitiveness, which was recently restored to a certain degree due to the marginal depreciation in the rupee against the dollar in the past two months," said Ajay Sahai, director general,  Federation of Indian Export Organisations (FIEO).

 "Inflation in most of our competing countries is in the range of 4 to 7 per cent. We would loose competitiveness in international market barring for sectors like gems and jewellery and petroleum products," added Sahai.

 Trade experts suggest that the rising inflation rate may not have a "very strong bearing" on Indian exporters in the recent future. "Rising fuel prices, which is one of the major drivers of inflation, have caused a rise in transport costs for exporters. But labour intensive companies will have to increase wages of its work force to compensate for rising cost of commodities," said
K T Chako, Director, Indian Institute of Foreign Trade.

 Agrees Sudhir Dhingra, chairman and managing director of Gurgaon based garment exporter Orient Craft, who said: "Workers in the textile sector work on minimum wages and cannot bear the burden of this inflation rate. We will have to do some thing. But then increasing wages will erode our competitiveness,".

 Wages account for up to 20 to 25 per cent of the cost of a product. "We may not see an immediate impact because of the current inflation rate. But in the mid term, Indian exporters will get hit," added Dhingra.

 Engineering goods sector, where pay scales account for three to six per cent of product cost,  is facing a similar situation. To make things worse, price of raw material like steel have risen  by 40 to 80 per cent in the last eight months. "Nearly 80 per cent of the cost in engineering goods sector is accounted by steel. The rising inflation rate will also mean increased manpower costs," said Rakesh Shah, chairman, Engineering Export Promotion Council. "As a result, it is difficult for exporters to commit to their international clients, who have other options to choose from".