Currency purge robs advantage given to exports by falling rupee

While a weaker rupee makes India an attractive import destination, production loss in the cash-strapped economy to slow down November export growth

The rupee, which hit a record low of 68.86 against the US dollar (USD) in intra-day deals on Thursday, may not boost exports in November, owing to the effects of demonetisation on domestic industry. After a rebound in exports in October, exporters feel labour intensive sectors hit hard by demonetisation may push down the export growth rate in November with greater fall in the following months.

On the other hand, the rupee's decline in November has coincided with similar or greater fall in values of currencies from other major emerging markets.

While Thursday saw the rupee surpass its earlier all-time intra-day low of 68.85 hit on August 28, 2013, it has declined by nearly 3% in November. This is comparable to a 5.6% loss for Malaysia's ringgit, the worst in Asia, and a 3.2% drop in Indonesia's rupiah, data shows. The Chinese yuan has also hit an 8-1/2 year low.

"This trend virtually wipes all advantages in the trade that a falling rupee might have allowed India," Devendra Pant, Chief Economist at India Ratings said. This might be crucial to India's export revival as demand conditions always beat currency conditions, he added.

Exports had risen for the second consecutive month in October, growing by 9.59% to $ 23.51 billion. This was only the second occasion in the 22 months since December 2014 when a chronic fall in exports started. This is due to a pickup in global import conditions which saw export figures for most major economies improve.

However, earlier this week, exporters informed Commerce and Industry Minister Nirmala Sitharaman that the government's ban on Rs 500 and Rs 1,000 currency notes would lead to a production decline in the short term. They also unanimously asked that the weekly withdrawal ceiling of Rs 50,000 allowed to industries be raised to a maximum of Rs 5,00,000.

Announced on October 8, the policy has lead to severe difficulties in sourcing input materials, paying informal workers and transporting goods in the past two weeks, exporters said.

"Sectors like textiles, handicrafts, carpets and handlooms source a large part of their input product from the unorganised sector and are therefore facing problems," Director General of Federation of Indian Export Organisations Ajay Sahai said.

The unorganised sector which accounts for a significant 45% of the domestic industry, apart from being the source of input raw materials also acts as a pool of labour for various sectors. Exporters say the situation is having a grave outcome for employment with large numbers of casual labourers looking at no work as well as downstream industries facing the loss of work.

Sahai added that the issue was about how long the problem persists, saying that data from the past 15 days suggest exports from sectors like engineering goods and automobiles will hold.

However, sources from both these sectors said under conditions of anonymity that demonetisation is expected to start a ripple effect which will see the export growth rate fall in December onwards when existing stocks ready for shipping start dwindling amidst production shortages.