INDUSTRY INSIGHTS The Rupee Falls: Will Exports Rise?
As the Indian rupee falls sharply against the US dollar, Samir Alam explores its potential significance for India’s apparel exports.
Exploring the impact of the fall in the Indian rupee against the US dollar on India’s apparel exports
This past year has presented the global textile and apparel industry with a slew of challenges, from fluctuating demand to pending fears of an all-out global trade war. However, the most pertinent economic phenomenon concerning the Indian apparel and textile businesses is the falling rupee and its potential impact on the future. In the midst of this uncertainty, the Indian industry is looking at the silver lining and is optimistic towards the export market, given the higher exchange rate against the US dollar.
But is this perspective sound and stable, or is it hiding a deep-rooted problem with the Indian economy, as many have speculated? Let’s begin by first identifying what has led to this precipitous decline in the value of the rupee, as that lies at the crux of the broader question: will this fall boost India’s exports?
TURKEY AND THE TIPPING POINT
The Indian rupee hit a record low against the dollar this past month, sliding to 73.13 just days after crossing 70 for the first time. This marked the depths of a downward spiral, which has been going on for nearly a year when the rupee fell to 63.67 in January. However, the overall falling trend was for more reasons than just the decline of Turkey. The three key factors plaguing the rupee can be identified as the rising price of crude oil, higher capital inflows, and the widening trade deficit.
But the sudden fall in July was exacerbated by the ongoing financial crisis that is plaguing Turkey, and hurting many developing nations in the process. Countries like South Africa, Argentina, Mexico, Brazil and Russia have all experienced a downward slide in their currency value during the same period. The currency decline was well underway since January, but it hit a tipping point in July 2018, when the Turkish lira dropped nearly 30 per cent in under a month.
While the two nations have no direct link that would impact India’s currency valuations, the problem was in investor perception. Turkey has acquired over US$466 billion in debt, which is over 51 per cent of its GDP, while India has over US$529 billion in debt but with over US$2.484 trillion GDP, which is about 18.57 per cent. This is where the problem of capital inflows is most prevalent, as the appearance of large national debt may create concern and trepidation among certain emerging market investors, as they did in Turkey.
But despite the overall slowdown in foreign investments in India during 2018 (compared to 2017), the fundamentals remain strong as India still wields US$424 billion in foreign reserves. But much like the panicked reaction to the Great Recession of 2008, the incident in Turkey triggered a wave of fear among global investors. By falling under the same demographic as Turkey–as emerging economies–India was placed under an unwanted spotlight. So, as investors began to dump their investments in Turkey and free up their capital, the rupee was also caught in the flurry. Although this impact on India was short-lived, it went a long way towards pushing the declining rupee even further and driving trade anxieties to an all-time high.
AS INVESTORS BEGAN TO DUMP THEIR INVESTMENTS IN TURKEY AND FREE UP THEIR CAPITAL, THE RUPEE WAS ALSO CAUGHT IN THE FLURRY.
A DOUBLE-EDGED SWORD
For many in the export trade, these clarifications only seek to embolden their optimism for the future. With an export-driven apparel and textile industry, India is definitely primed for a pleasantly surprising boost in its export earnings. However, this is a veiled benefit that has no lasting value in the bottom lines of company accounts. This is mainly because of how the current textile and apparel value chain is established in the country. The Indian industry is deeply embedded in the global supply chain, with numerous imports supporting the export businesses.
While having an undervalued or depreciated currency may seem to imply ample export revenue, this is not the case. A weaker value does act as a direct subsidy for exports and has helped nations like China who’ve benefitted from this for decades. But it does not work for a diversified multi-party trading nation like India, which is reliant on regional and multilateral agreements. This is the main reason why the RBI has time and again stayed away from depreciating the rupee through direct intervention to boost exports–it simply doesn’t work.
The Indian apparel and textile industry is intertwined with major regional and global partners, leading to significant import dependence. And while India continues to import apparel-centric materials like wool, synthetics and textile machinery, the benefits of a depreciated currency will be lost to the rising production costs for export goods. Moreover, the shortterm fluctuations in currency will take time to pay any dividends for apparel exports, since most contracts have locked-in rates on a quarter-onquarter basis. This means that these hedged prices prevent any sudden depreciation from impacting seasonal trade. In practice, it may take up to two years for these new low rates to find themselves enacted in actual trade. The dominant exchange rate will still be negotiated between Indian suppliers and their overseas customers, leading to a more level playing field and an unlikely windfall in profits.
THE SHORT-TERM FLUCTUATIONS IN CURRENCY WILL TAKE TIME TO PAY ANY DIVIDENDS FOR APPAREL EXPORTS.
Even as many export-oriented industries consider the long-term potentials of this trend as a bonus to their earnings, this gain has been offset. Furthermore, this offset affects not only apparel and textile but also on a national level. India is rapidly expanding its energy footprint and as a result has become Asia’s third largest oil consumer. Nearly two-thirds of the nation’s oil requirements are fulfilled by imports, thus steadily leading to higher prices. According to analysts, the high crude prices are a key factor in depreciating the value of the rupee.
The macro-result of this trend is simple: India is losing out on its balance of trade, with a wider current account deficit, as imports exceed exports. The Reserve Bank of India has already reacted to this shift by raising interest rates twice so far, as a stop-gap measure to protect the value of the rupee. But it is unlikely that this will have long-term benefits since it is sure to be undone by inflation pressures. The key problem is that as long as our import expenditure remains high with oil imports and global uncertainties on the rise, the value of the rupee will plunge.
THE WAY FORWARD
And while this may present exporters with a golden window to seize the dollar opportunity, they need to be wary. Many of India’s apparel and textile industry competitors are facing the same situation. These competitors also have the benefit of boosting their export opportunities with their own weaker currencies. As a result, the possibility of their undercutting India on price remains high. If this happens, India risks losing its competitive advantage in the global marketplace and eventually spiralling into an export decline as well.
The phenomenon of devalued currency is a new experience for India in the post-globalisation era and it requires careful navigation. While apparel and textile exporters are reasonable in leveraging the current circumstances, they should be wary of future changes. For many, the value chain tie-up with import adjustments will lead to a natural equilibrium in profits for the long run. Those trades which have an unhedged payment structure will immediately benefit from the devalued rupee, but the market will be quick to respond, as trading partners will also scale back their payments and seek new terms.
Under these conditions, Indian traders would be wise to forgo short-term gains and establish long-term partnerships that push India’s competitive advantages ahead of their regional competition, in order to be in a better strategic position once the currency fluctuation normalises. This is the only way to pivot this setback and gain lasting benefits in the long run.