Overheated Re threatens to slow growth, costs millions their jobs

Overheated Re threatens to slow growth, costs millions their jobs
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First Published: Tue, Jan 01 2008. 11 18 PM IST

Unkind cut: A garments production unit in Bangalore. With a stronger rupee shrinking profit margins, textile firms have laid off many workers.
Unkind cut: A garments production unit in Bangalore. With a stronger rupee shrinking profit margins, textile firms have laid off many workers.
Updated: Tue, Jan 01 2008. 11 18 PM IST
Gurgaon: The meteoric rise of the rupee might be good news for Indians who travel abroad, but it spells disaster for millions of entrepreneurs such as Rajiv Prem, a clothing exporter in this dusty boom town.
Unkind cut: A garments production unit in Bangalore. With a stronger rupee shrinking profit margins, textile firms have laid off many workers.
Prem has had to close one of his three factories and lay off about 200 workers, more than a fifth of his workforce. Most were tailors and seamstresses who made clothes mainly for US retailers, including H&M Hennes and Mauritz AB, Kohl’s Illinois Inc., and Anthropologie.
“It's disappointing that the rupee’s appreciation is costing these people their jobs,” said Prem, 53. “This is probably going to make their lives more difficult, and they've done nothing to deserve it.”
Prem now faces the gloomy prospect of another round of layoffs, because the rupee's rise shows few signs of stabilizing. “It's frustrating because we didn't anticipate the rupee working against us,” he said. “I don't want to say I'm angry about it, because I know these are market forces at work. It's nothing personal.”
Still, the overheated rupee threatens to slow down one of the world's fastest growing economies.
The hardest hit are exports, an annual $125 billion (Rs4.93 trillion) industry representing nearly one-fifth of India’s economy. That includes clothes, leather goods, paper products, handicrafts, furniture and pharmaceuticals.
The strong rupee has led to job cuts as more and more Indian exports become too expensive for Western buyers, forcing them look elsewhere for better deals. Often that's China, India’s biggest competitor and a country often criticized for artificially devaluing its own currency to remain competitive in global markets.
Also affected is India's outsourcing industry—one of the country’s fastest growing sectors. A steady increase in wages, as much as 25% in sectors desperate for skilled professionals, and the rising rupee are starting to limit the influx of Western firms seeking cheap labour for its call centre services and back-office support.
Some industry experts say that as many as four million jobs were lost last year because of the skyrocketing rupee, and that another four million people are expected to lose their jobs in the coming months if the government continues to allow the rupee to rise.
“The rupee has to be stopped,” said Ganesh Gupta, president of the Federation of Indian Exporters Organization, which represents about 14,000 export companies in India. “I take 50 phone calls a day from exporters complaining that the rupee starting appreciating during my tenure as president, as if I had something to do with it. I'm an exporter myself and I understand their fear. Once a customer stops buying from India, it’s hard to get them to come back.”
The rupee has grown nearly 12% in the past year, from a level of 44 to the dollar at the beginning of 2007, to 39 now. India's currency is outpacing the growth rate of its economy, which has been averaging about 9% a year.
So far, the Reserve Bank of India (RBI) has been watching from the sidelines. It has been reluctant to step in to devalue the rupee because, analysts say, that could worsen domestic inflation, making it even harder for the majority of India’s 1.1 billion people— among the world's poorest, to buy basic necessities such as food and fuel.
On the other hand, many experts agree that if nothing is done to slow the rupee's rise, foreign demand for Indian exports will continue spiralling downwards, throwing millions of Indians out of work in a country where a welfare safety net is virtually nonexistent.
Officials at RBI have been tight-lipped, setting off a recent flurry of editorials in newspapers and television news talk shows.
“It’s time India learnt from Japan and China that at the crucial stage of economic growth, an undervalued exchange rate is preferable to an appreciating rate, no matter its advantages in fighting inflation,” D. Sambandhan and M. Ramachandran, politics and economics professors at Pondicherry University, wrote recently in The Hindu.
Atul Mehra, 37, owner of Mehra Bros, a handicrafts retailer in New Delhi, said exports to the US accounted for nearly one-third of his family's business. But the rising rupee has nearly cut off that revenue stream, forcing him to pull back on expenses like dining out and hosting parties—popular activities among India's growing middle class.
Instead, Mehra turns his attention to his four-year-old daughter. “I was saving money so she could go abroad for college,” he said. “Now it is looking like that is beyond my reach.”
©2008/Cox News Service
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First Published: Tue, Jan 01 2008. 11 18 PM IST
More Topics: Rupee | Jobs | Growth | RBI | Economy and Politics |