Glass ceiling3 min read . Updated: 04 Dec 2007, 11:53 PM IST
The headline export numbers are deceptive. The latest trade data shows that exports increased at an annual rate of 35.6% in October, the highest growth rate in 15 months. Was all that hue and cry about how a strong rupee will make Indian exports uncompetitive a bit overdone?
Some of the larger companies such as Bajaj Auto could be sacrificing their profits to keep up their presence in the export markets. That’s not something smaller companies, which account for a sizeable chunk of India’s exports, can emulate. And there continue to be reports from areas such as Tirupur, the garments hub in Tamil Nadu, about how companies are laying off workers because the strong rupee is hurting them.
So, while the overall export performance in October is reassuring, it hides the fact that most of the gains come from import-intensive industries such as oil refining and gems and jewellery. In the latter, for example, the rising rupee helped manufacturers source cheaper raw materials such as crude oil and rough diamonds abroad.
This is not an option for a range of industries that still depend heavily on domestic inputs. As global currencies realign over the next few months, companies in areas such as textiles and garments will have to change their sourcing and supply chain strategies. But that will take time to materialize.
In fact, the bad news is yet to come. It will have to await the full release of the 2007 export data. A harbinger of things is available from detailed data for the first three months of 2007-08 (April to June).
In the case of textiles, exports fell by 10.37% over the same period last year. Handicrafts exports fell by a whopping 43.5% and those of marine products by 12%. Only leather goods had a positive growth rate, a measly 2.4%. This trend started around the time the dollar began its slide sometime last year. Millions of jobs hang in the balance; their existence depends on export prospects. This is likely to lead to even more pressure on the government to provide sops to exporters. But that is an immediate palliative rather than a long-term solution. Somebody will have to foot the bill for export subsidies, direct or indirect. Nor would it be sensible to expect the Reserve Bank of India to intervene in the foreign exchange market to push the rupee down. That would be expensive for the government in terms of fiscal costs and for consumers in terms of higher inflation.
The only sustainable solution is for companies to adjust and innovate; otherwise what we will end up with is a subsidy mountain that grows with every rise in the rupee. (Gerard Lyons, chief economist of Standard Chartered Bank, says the rupee could move up to Rs30 to a dollar in the course of time.)
Where does that leave us? High-end exporters in sectors such as IT are finding innovative solutions to handle the rising rupee. As reported in Mint on Tuesday, software biggies such as Infosys and Wipro are reusing software code. Code from products for existing clients is being reused for new clients. Discounts and low billing, which confer an advantage in export markets, are the result. But this is not taking place in textiles and other similarly placed sectors. Innovative efforts in the “low-end" exports sectors are a must if Indian exports are to survive.
How that will be achieved is the big question. But hasty export subsidies will not serve the purpose; they will be a disincentive for exporters to innovate and adjust to the strong rupee.
Are export subsidies the right way to help small exporters come to terms with a strong rupee? Write to us at email@example.com