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Mar 27, 2008

Appreciation of rupees in Indian perspective

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By P. Neelakantha Achary

The Indian economy is among the fastest growing economies in the world. The people have been now realising the true meaning of ‘shining India’. The liberalisation reforms of 1991 have been proved successful and it delivered the success in many ways. The economy is on the development path and maintaining a sustain growth rate. The GDP has been around eight per cent for three consecutive years. It can be expected that the day is no longer to see the Indian economy as the second largest economy of the world. The rising infrastructure and cheap manpower made this economy as favourable destination for investors. However, the agriculture sector is not at the pace as it depends on the irrigation measures and rain fed. The economic epidemics like poverty, population and low productivity, are biggest challenges to its growth. The dream of achieving the dual digit of GDP is a tough challenge ahead but it can be achieved. The revolution of the Information and Technology (IT) has made Indian economy further stronger. The sector has been providing a big relief to countries unemployment problem. India has been the favourite destination for countries to venture outsourcing projects, as cheap labour cost is the key factor.

The economy has been developing in most all the sectors and the Indian rupees marks its presence in the global market. Dollar used to be the most invoicing currency for foreign trade. Due to depreciation of dollar against Indian rupees made Indian economy further stronger in global arena. The value dollar in terms of Indians rupees used to be around Rs. 47, but it is significantly dropped to around 40 rupees. The depreciation of dollar and appreciation of rupees has put positive impact on Indian economy. It is worth mentioning here that, appreciation of rupees will have positive impact on import whereas it will have adverse effect on the export and IT sector. Let’s have a look on the impact of appreciation of rupees on export and software sectors.

The export sector of Indian economy made comprehensive progress over the last decade. The export sector has been contributing a lot to the GDP. The Indian export has been on rise, it grew by around twenty percent in comparison to the figures of the last year. The overall exports suggest that the Indian has been exporting its goods and services to the countries like Pakistan, UAE, Italy and US. It is very important to understand the Indo-US trade relations to know the impact of deprecation of dollar against rupees.

The reforms of 1991 have propounded the Indian export sector. The nation has been attracting the foreign investment flow and accelerating the trade flow. In Indian perspective, the Indo-US trade relation is very successful for the export and imports of goods and services. India has been exporting goods are services to US including metals, textile, sea foods, iron/steel products, machinery and chemicals. India’s share in US trade is 24th in US export and 18th in US imports. According to the statistical reports, the India’s export to the US in the year 2006-07 was 126,262.68 million US dollars, and it was 103,090.54 million US dollar in 2005-07 and US dollar is the invoicing currency for the trade. It is evident from the above figures that the trade with the US is a matter of million dollars, and a little volatile in the value of invoicing currency would result a loss or gain of million dollars. Let’s consider that the depreciation of dollar by 7 rupees from 47 to 40 rupees per dollar. Then the loss would be around fifteen percent, as the dollar depreciation from 47 to 40 rupees. In export the fifteen per cent matters much. The margin of fifteen per cent is enough to hit the profits. If a detail analysis would be made into the subject, then the out would give us clear cut picture about the net loss. In other words, the impact can be measure as loss of some million dollars, due to the depreciation of dollar.

It is significant to know that India's main exports to US are precious stones, worked diamonds, gold jewellery, miscellaneous textile article, fish and seafood, textile floor coverings, iron/steel products, organic chemicals and machinery that includes transmission shafts, gears, pistons, etc. A fluctuation in the value of dollar or rupees would affect the volume of export to US. The US dollar is main invoicing currency and a fluctuation will have larger impact on the volume of the export. Ultimately, it will hit the profits of the exporters.

For example, India has been exporting textile to the US. The depreciation of dollar will result huge loss in the revenue from the textile exporters. The loss will be suffered by the textiles industries but it will have negative impact on the manpower too. There will cascading effect on the laboures of textile industries, wherever there is huge loss incurred. So, the depreciation of dollar is not only affecting the textile exports but also affecting the household economy too. This is a big challenge ahead of us that need to be addressed through proper mechanism.

Considering this situation, the government of India has made its clear stand on the depreciation of dollar. According to the Economic Survey 2008-9, the depreciation of the dollar has slow down the growth of export and imports of major trading partners like United States. In order to address the concern, the government has approved some measures in the survey. The measures include: 3 per cent increase in the Duty Entitlement Pass Book (DEPB) rates for nine sectors; 10 per cent reduction in Export Credit Guarantee Corporation (ECGC) premium and release of around Rs 600 crore to clear all arrears of terminal excise duties and Central Sales Tax reimbursement. This would be a greater step towards protecting interest of the exporters.

Let’s evaluate the impact of depreciation of dollar on the Information & Technology (IT) and its export. India is emerged as the world leader in software development in the global arena. The IT sector has been achieving international accolade and giving tough competition to other countries. Some of the IT giant names of India like Satyam, Wipro, and Infosys are enough to portray the bang of IT sector of India. Indian IT sector is not only promises of redelivering best quality software development but also known for its human resources training and IT enable services which began in early 90’s. Indian Software Industry is estimated to be worth USD 1.2 billion. The sector has been growing significantly and many countries have been depending on India for their officer operations and automations. The poor infrastructure of the nation would be a set back to the software sector as major operations are set up in the metro cities only. According to a projection the annual revenue of IT industry in India would around $ 87 billion. Many nations have initiated for joint venture with Indian companies for IT enabled services.

The revenue from the software sector is key phenomenon for Indian economy. India’s excellence in software development and IT-enable services have drawn attention of global investors to invest in India. The IT sector has been boosting the employment opportunities which will be a key factor for the development of economy in a long-run. However, the high attrition rate and outflow of talent are the set back for this sector.

The depreciation of dollar has put negative impact on the software sector. The depreciation had hit the profit of the sector and their products and services are priced in foreign currencies. If the export of the software services were calculated in terms of dollar then a little change in the value of dollar is enough to hit the profit directly. It is clear that exchange value of dollar against rupees was 47 and at present it is around 40, if these figures will be considered then the net loss would be much more. This would a great loss to economy as the sector has been contributing a lot to the growth.

The bottom line is that the depreciation of dollar will have not only negative impact but also positive impact on Indian economy too. The importer will be on benefits as the import the goods and services by paying less as comparison in contract to depreciation of dollar. The appreciation of rupees will be a positive score for the borrowers of foreign loans. In a long-run, the positive and negative impact of depreciation of dollar against rupees will certainly change the fate of Indian economy.


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