Who's afraid of a stronger rupee?

Not exporters, who are learning to live with a harder currency thanks to smarter hedging. But taxation and costs remain a worry

A strong rupee is likely hang like the Sword of Damocles over the country’s export sector in 2011 too, but that didn’t stop them from popping the champagne to usher in the New Year. With the economy picking up steam, “Most exporters have learned to live with a strong rupee,” Ravi Toshniwal, joint managing director of garment exporter Banswara Syntex, told Business Standard.

“Forward premium is what we are betting on big time. We are now forward booking our export earnings for six to eight months, depending on the premium. Earlier, we used derivative premiums. Now, it is a more vanilla premium on forward booking. Exporters are much smarter now,” Toshniwal added.

The rupee is expected to remain strong in 2011-2012 on the back of robust fundamentals and with high rate and growth differentials setting the stage for capital flows into the country, said Nomura in a research note. It also warned against possible risk from a rise in oil prices that could “stretch the trade deficit and lead to downward pressure on the rupee,” said Normura’s Prabhat Awasthi.(click for WIDENING GAP)

The country’s merchandise exports have registered a positive growth since November 2009, prior to which it had fallen steeply due to the global economic downturn. In the current financial year, April-November exports stood at $140.28 billion, a rise of 26.7 per cent over the $110.68 billion in the corresponding period of 2009-10, according to official data.

While exports are estimated to end up at $210-$215 billion for the entire fiscal, imports are likely to touch around $350 billion, leaving a trade deficit at $130-$135 billion, the ministry of commerce & industry had said earlier.(Click for CURRENCY CLIMB)

A slew of big-ticket government disinvestments planned this year in public sector undertakings (PSUs) such as Indian Oil Corporation, Steel Authority of India and ONGC will also contribute to the Indian currency’s appreciation.

“There would be much more action in the IPO segment of PSUs this year than in 2010. So, naturally, the rupee will continue to remain strong. Exporters should remain cautious, and the government should focus on specific policy interventions,” said Ramu S Deora, president, Federation of Indian Export Organisations and chairman of Mumbai-based G Amphray Laboratories.

Deora, an industry veteran, feels the government should first look at giving export profits tax exemption for at least two to three years to sustain the pickup in exports and generate employment, which is still a concern, especially among small & medium enterprises (SMEs), which contribute more than 45 per cent to the country’s total exports.

Currency volatility is also a concern. According to the latest report by Crisil, which forecasts the country’s growth rate to remain at 8.4 per cent over the next five years, any sudden shocks to the global economic recovery might lead to capital outflows from India, resulting in increased volatility of the rupee.

“A rise in exports depends on the outlook of destination economies. India’s exports are largely dependent on China, which is our largest trading partner now. Our exports are now increasingly diversifying. The rupee is expected to stay high in 2011, with periodic bouts of capital inflows and a series of IPOs that are in the pipeline. However, significant volatility can be unnerving, as exporters operate on very thin margins. So, ideally, (exporters) should look for more innovative ways of hedging,” said Ajit Ranade, chief economist, Aditya Birla Group.

Exporters with high labour costs are also likely to struggle to maintain their competitiveness in the face of a rising rupee. Higher wages and possible strengthening of the rupee pose a double threat to some exporters, Nomura added.

“Employment is definitely still a concern. But exporters have realised that a rise in the rupee is part of the business. Currency volatility

exists all over the world, though high volatility could be painful. Exports will rise despite a volatile rupee and high input costs,” said Jatin R Mehta, chairman & managing director of Su-Raj Diamonds & Jewellery. Mehta is the newly elected chairman of Export Promotion Council for EOUs & SEZs.

Toshniwal agrees. He believes India’s trade deficit would remain high, but exports from India would remain competitive. “There is no reason to panic. The market is expected to remain buoyant and China is not going to be as competitive as it used to be. Moreover, bankers have now become our fair-weather friends, so 2011 should turn out to be a good year,” he said.

External trade has expanded rapidly in the past ten years. India's merchandise and services exports grew from $60.9 billion in 2000-01 to $272.5 billion in 2009-10. Imports grew briskly, too. However, the challenge lies in increasing India’s share in world exports from a mere 1.2 per cent by expanding into new, fast-growing markets, noted Crisil. According to the World Trade Organisation, India’s share in international trade was 0.8 per cent in 2003.