EXPORTERS’ MARGIN FURTHER SQUEEZED BETWEEN MAY AND AUGUST, 2007 : PHD CHAMBER SURVEY

Profit margins of Indian exporters have steadily eroded between May and August (till 16), 2007 because of the rupee appreciation against dollar. Ongoing trend would adversely affect the future export prospects in the US market by making Indian goods more expensive vis-a-vis products of neighboring countries, whose currencies have not appreciated much. The recent reduction in the US interest rate will not have any immediate impact on the rupee against dollar and consequently on Indian exports.

These are some of the upshots of a recent survey undertaken by the PHD Chamber. Responses from a cross section of industry –exporters, importers and manufacturing-were compiled and analyzed. The objective of the survey was to compare the mood of the industry in general and exporters in particular- about the challenges being faced by the Indian industry on account of rupee hardening between two time horizons viz before May 2007 and between May and August 16, 2007.

Survey Highlights

How is exporter affected by the rising rupee?
Exporters:
Incurring Loss between the period of invoicing and realizing of proceeds. Price sensitive manufacturing items such as textiles, capital goods, food and medical products most affected.

IT exports, particularly software and services like back office operations are being affected on account of the large number of private equity funds filing bankruptcy petitions on account of the sub-prime mortgage crisis in the US. These firms were outsourcing their works to India

Expect revenues to decline by up to 10 percent due to reluctance of buyers to review prices.

90% feel that their future exports would suffer due to the rising rupee and cash flow crisis in most of the developed countries, especially US

70%, maintain that the rally of rupee is the most important concern, followed by rising interest rates, rise in raw material cost and high transaction costs of exports.

How would the importer be impacted:
Importers:
Import competing industries will come under severe strain on account of cheap imports.

To benefit industry having massive expansion plans requiring import of machinery and equipment.

Companies taking loan in foreign currency benefited.

Import –led export segments are less affected

Invoicing of Exports:
65% raise bills both in dollars and euro.

45% raise bills exclusively in dollars.

Yen or Pound not the commonly used currency.

42% contemplating to switch over to euro or even increase their exposure to this currency for purpose of invoicing.

Looking Beyond
Against this backdrop, exporters maintain that there is an impelling need for the government to come up with innovative measures to ensure that the rupee is not overvalued from the vantage point of India’s competitiveness. In this context, the respondents have made the following suggestions.

The RBI should intervene more actively in the foreign exchange market to limit further appreciation of the rupee. This becomes very much essential in view of lower currency appreciation of competitor Asian countries and an almost fixed exchange rate of Chinese currency.

Interest rates in India are at least 3-5 percentage points higher in real terms than in the US and other advanced countries. This calls for reduction in the rates of interest to a level which suits market conditions. Interest cost for export credit should not be more than 6.5 per cent.

Forward foreign exchange cover should be made available to exporters at reasonable rates.

The government should provide an across the board duty drawback to exporters in order to compensate firms for the higher transactions cost of exports (to the extent of 8-10%) as compared to countries like China.