The rupee's rising, what can small software firms do?

The rising value of the Indian rupee against the US dollar has played havoc with exporters' bottomlines for over a year and half now, and small and medium software businesses are no exception to this.

As more than 60 per cent of Indian software exports are destined for the US and at least 40 per cent of the balance "� though shipped elsewhere "� is denominated in US dollars, over 75 per cent of the revenue software exporters earn is in US dollars.

For each dollar's worth of export, the exporter got nearly Rs 49 in early 2002. He now gets Rs 45.60, a 7 per cent fall.

One must remember that the overseas importer is invariably exchange rate sensitive and takes every opportunity to force the exporter to reduce prices whenever the rupee's value falls but is extremely loth to raise costs in his purchasing currency to compensate the exporter for reduced rupee earnings resulting from the rising rupee.

Add to this the exporter's rising costs owing to inflation and other factors, and the market compulsion of passing on any reduction in input costs (globally falling hardware costs) to the overseas buyer to retain competitiveness and you have a grim picture in, surprisingly, a burgeoning market.

According to industry sources, the situation has been especially agonising for small and medium software exporters since in practice they are not quite in a position to avail of the benefit (30-40 per cent) of duty free import of inputs freely.

The cost and bother of supervision, follow up, clearing, inspection, paper work and bonded warehouse procedures relating to duty free imports which can be easily absorbed by large organisations tend to become particularly irksome and unaffordable to small and medium exporters of software services. This, in turn, also affects their ability to enter competitive price bids for exports.

Although there are no readymade solutions, some ways of alleviating their pain follow:

• Through their representative bodies at different levels, small and medium software exporters must lobby for reducing the statutory procedural rigours of the administration of duty benefits for the import of inputs.

A simple semi-annual or annual certificate from exporters' bankers showing their exports during the period should suffice to earn for them freedom from duty on imports up to a reasonably sufficient percentage of their exports across the board without requiring extended formalities of supervision, inspection, bonding and associated paper work or export performance guarantees.

In view of the country's rapidly growing foreign exchange reserves, there should be no logical objection to this.

Also, why curb the Indian export potential by continuing with onerous administrative procedures?

This at a time when between 2001-2002 and 2002-2003 Indian software and services exports rose from US$8.45 billion to US$ 9.78 billion, when globally falling hardware prices are freeing funds in developed countries for increasing investment in software-related expenditure (in the US alone hardware spending is likely to fall from the current 25 per cent of IT costs to around 20 per cent by the end of 2004-2005, releasing $70 billion to be spent on software additionally) and when India is now the preferred destination for software services orders.

Apart from increasing imports in dollars, exporters should ensure that whatever other permissible expenses such as overseas office expenses, business promotion and marketing expenses and preoperative expenses that can be paid for in dollars are not incurred in rupees.

Medium and small exporters should try, as far as practicable, to spread their currency risks by trying to prevail on their overseas buyers to settle for payments in currencies other than the US dollar.

Some dollar exports will remain, but the erosion in rupee proceeds from dollar exports would be compensated to some extent by the appreciation in the value of other currencies against the rupee.

In early 2002, 1 euro worth of exports fetched nearly Rs 46. Today it fetches more than Rs 55. This is because the dollar fell much more against the euro than against the rupee during the same period.

Exporters should preferably have an ongoing arrangement for exchange exposure management, whether through an in house set up or by arranging expertise from outside.

The current impasse is the result of an eternal belief in the falling rupee, encouraged actively by the government over the years.

But notice that the euro and the pound have been rising steadily against the rupee over the same period. The situation may reverse itself a year or two down the line, or even earlier.

There should be adequate ongoing analysis and preventive action to ensure that final rupee earnings of exporters do not start falling suddenly with anybody knowing what to do.

Currency exposure management through straight hedging of export receivables, bookings and cancellations of foreign exchange receivables and payables, the use of derivatives (options and cross currency / interest rate swaps) form part of this ongoing management.

Larger exporters are progressively becoming aware of the necessity of proactive foreign exchange exposure management. It is high time that small and medium people had a look at it too.

Debasish Datta is a foreign exchange consultant to companies and banks