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Exports to European Union, India's biggest export market may grow by 2.6 per cent this year down from 7.2 per cent growth last fiscal and five-year average growth of 8.7 per cent. The calculation is based on the merchandise export data for April-December 2014 period.
Euro has lost nearly a quarter of its value against rupee since August 2013. In comparison, rupee has been one of the top performing currencies during the period. European Union accounted for 16.4 per cent of India's overall merchandise exports of $319 billion in FY14.
"The continued depreciation in the Euro is pinching us the most. Most of our raw materials come from China which is billed in dollars but Europe is our biggest export market forcing us to take a hit on margins," says Sunil Sikka, president, Havells India. Noida headquartered company's is India's largest electrical goods manufacturer and exported Rs 316 crore worth of goods in FY14.
The company's export volumes to the continent has been not been hit so far, but if the current trend in currency markets persists, it may be forced to take a price hike hurting its volumes. "We have absorbed the currency impact so far but sooner or latter we have to either take a price hike or curtail our exposure to the continent," adds Sunil.
India's global exports of electrical equipment are likely to decline by 15.3 per cent in FY15 over last year while those to European Union (EU) may fall by 10.6 per cent this year. The calculation is based on the export trend in the first nine months of current fiscal. EU takes in a third of the India's export of electrical equipment. A similar trend is visible in exports of auto & auto parts (down 7.9 per cent on y-o-y basis) and pharmaceuticals (down 2.1 per cent) to EU.
Economists agree. "India's nominal and real effective exchange rates are moving in the same direction and currency is now over valued relative to competing currencies such as such as Euro, Yen, Indonesian Rupiah and Brazilian Real. This has made exports uncompetitive in many markets hurting our chances. Slowdown in exports may also have some negative impact on GDP growth going forward," says Madan Sabnavis, chief economist at CARE Ratings.
Exports are increasingly playing a major role in India's growth story and accounted for 18.1 per cent of GDP in dollar terms in FY14 up from 14.3 per cent in FY08 on the eve of 2008 global financial crisis.
Some experts however blame the recent deceleration in export growth on growth slowdown in major economies in last few years. "It's impossible to imagine faster export growth when two of the world's biggest economies, Europe and China, are slowing down. The US economy is doing well but there is limit to its contribution to India's incremental export growth," says Devendra Pant, head public finance at India Ratings.
He discounts the currency impact. "It's a fallacy that cheaper currency helps export and discourages imports. The key is the purchasing power of the customers in the destination market. Latter is under attack due to global economic slowdown," adds Pant.
Even if he is right, an overvalued exchange rate has made it tougher for Indian manufacturers to lure consumers when income growth in most market have either slowed down or plateaued.
