Between Thinning Margins and Rising Costs

Mr. A Sakthivel, Vice President, FIEO (centre) addressing the meeting. Others, from left are: Mr. Abraham Varkey, DGM, SBI; Mr. Rajendra J Hinduja, ED, Gokaldas Exports Ltd.; Mrs. Mahpara Ali, CGM, SBI, Bangalore; Mr. D Muralidhar, Sr.VP, FKCCI; Mr. Harikrishnan, DGM, RBI, Bangalore & Mr. N Krishnamurthy, CEO, VSM 0Software (P) Ltd.

With rupee appreciating by almost 12% since January this year, export earnings have dipped substantially and most exporters have begun laying off workers to cut down production capacities. The Government has offered some relief, but exporters find it too inadequate to cover the losses that they are suffering for rupee going stronger month after month.

In order to assess the situation and to deliberate on how to combat this new challenge, FIEO Karnataka Chapter, in association with Federation of Karnataka Chamber of Commerce & Industry (FKCCI), organized a Seminar titled ‘Appreciating Rupee Value - What Next!’ on 8th October at Bangalore. More than 140 exporters of Karnataka attended the Seminar. 

While welcoming the participants, FIEO Vice President Mr. A Sakthivel observed that as Indian products were facing tough competition with products from many other countries in terms of price, appreciating rupee was virtually throwing out Indian products from international market. The government’s programmes, such as ‘Focus LAC’ or ‘Focus Africa’, to diversify Indian products into new markets, is also not delivering expected results and as a matter of fact US still remains the largest trading partner for us, added Mr. Sakthivel.

According to FIEO Vice President, employment prospects in manufacturing sectors, especially textile, leather and engineering, are severely spoiled as the labour intensive small and medium enterprises are the bigger victims of appreciating rupee. In textile sector alone, he said, the country has lost the opportunity to create 5.8 lakh new jobs targeted for the current fiscal.

Reacting to the relief package announced by the Government to offset the impact of stronger rupee on exporters’ profitability, Mr. Sakthivel pointed out that most of the announcements made months back were yet to be implemented and a few of the announcements made so far were largely inadequate. "Announcement of reduced interest rate on export credit is creating marginal impact as PLR has already gone up. Similarly, the announcement of tax exemption on services used by exporters is not more than a pinch of salt as only seven services have been listed for exemption and a host of other services such as commission to foreign agents, charges paid to CHAs, professional fees, transportation cost for carrying goods from factories to ICD etc. have been left aside." He said.

FIEO Vice President urged that to sustain high export growth the interest rate on pre and post shipment finance for the exporters should not be more than 6% as recommended by various committees and a new policy regime for complete exemption of all service taxes and other levies including fringe benefit tax and VAT for exporters should be brought in place. Meanwhile, Mr. Sakthivel advised participating exporters to cover currency risks through hedging and other instruments at one hand and by importing modern technologies and machineries to improve productivity on the other.

While introducing the subject to the participants, Sr. Vice President of FKCCI Mr. D Muralidhar went ahead with saying that reduced interest rate and refund of taxes alone would not be sufficient to offset losses which were by all accounts huge and urged that export finance should be made completely interest free.

Ms. Neerja Rajkumar, Addl. Chief Secretary of Karnataka in her inaugural address admitted that exporters were getting sandwiched between thinning margins due to rupee appreciation and increased cost of production due to hike in wages and salaries. She, however, observed that no amount of government policy initiatives could suffice to meet the challenge and exporters had no option other than raising their manufacturing efficiency to achieve higher unit value realization for their products. She advised the exporters to switch over from primary products to value added products.

SBI Chief General Manager Ms. Mahpara Ali in her address observed that exporters traditionally refrained from hedging due to the depreciating trend of rupee until 2002. Afterwards also, when rupee began to appreciate, she said, exporters didn’t feel the pinch as the appreciation was little and gradual and they were able maintain overall profitability by increasing their efficiency, but the steep appreciation of rupee since March 2007 was upsetting the exporters. Referring to various reports, she said, the dollar may touch 37 by March next year and if the predictions of foreign banks in India were to be true, the dollar may get 

Mr. A Sakthivel with Ms. Neeraja Rajkumar, Addl. Chief Secy., Karnataka

close to 34. She advised the exporters to make use of several tailor-made products offered by the banks to cover currency risks.

Initiating the panel discussion that followed presentations, Mr. Sakthivel observed that during the initial years of liberalization the Government was relying on exporters to bring in precious foreign exchange for the country and was thus offering various incentives such as income tax benefits to them. Having built up a sound foreign exchange reserves through the efforts of exporters and now with the increased flow of foreign investments, he said, the government was turning neglectful towards exports. He warned that relying on foreign institutional investors as sustainable source of foreign exchange would be dangerous as any correction in the economy would drive away their investments in no time. Export earnings could be the only reliable source of foreign exchange for the country, stressed Mr. Sakthivel.

The Executive Director of the country’s largest garment export unit Gokaldas Exports Ltd., Mr. Rajendra Hinduja said exporters could manage to increase the price of their products by 2 to 3 percent but this would not compensate for even one-tenth of the total losses suffered by them. He urges the government has to come forward to compensate the remaining part of their losses. Referring to the sops announced by the government in this regard, Mr. Hinduja said the announcement like interest for EEFC account would not benefit any exporter because nobody would be willing to keep dollars in EEFC account in present situation. He further said: "Duty Drawback has been increased by 2-3% which is very marginal. Moreover, the EOUs, which earn annual foreign exchange worth Rs. 66,000 crore and employ 7 lakh people, are not entitled for drawback." Mr. Hinduja believes that restoring income tax benefits to exporters would be the most appropriate relief provided by the government. He is of the view that India can only pursue job oriented economic growth policy and for this industrial sectors like textiles should be encouraged.

The CEO of VSM Software (P) Ltd, Mr. N Krishnamurthy said we should learn from Japan and implement simultaneously short-term measures like hedging and long-term measures diversification of export basket. RBI’s Dy. General Manager Mr. Harikrishnan highlighted the recent initiatives taken by the Central Bank to help exporters. 

A view of the participants.

SBI’s Dy. General Manager Mr. Abraham Varkey made a technical presentation on rupee movement, rupee forecast and options available to the exporters. Mr. J Crasta, Vice President, FKCCI proposed vote of thanks. 

Observations Made By Participants AT BANGALORE

  • Volatility in the forex market will continue. The ability of an organization to take risk and cover it in a balanced way will matter the most. 

  • Improving productivity should be the new strategy. As it would not be possible to reduce the cost of manpower in the current scenario, so the focus should be on how to increase the productivity of our manpower.

  • The issue of rupee appreciation is being viewed as the problem of exporters alone. It should be viewed in the context of 50 million people engaged in the export industry.  

  • The Govt. has created self-perpetuating conditions for huge inflow of foreign funds into the country by offering prospects of appreciating currency. Our stock markets and real estate markets are booming due to avalanche of FII inflows. The economy is overheating. There are four options before our Central Bank.

  • The Central Bank may close the ECB route or put an interest surcharge on ECB borrowings. There is no reason why large corporate be able to borrow huge funds at lower interest rates than the rest of the economy and thereby cause surplus liquidity which is inflationary.

  • The Central Bank may also reduce interest rate. This will dampen the inflow of foreign funds and also the danger of inflation from liquidity. Besides, reduced interest rate will also reduce the cost of manufacturing and thus will help reduce inflation.

  • The Central Bank may also consider a fixed exchange rate for a year or two. The rupee may be allowed to move in a small band of + or – 3%.

  • The Central Bank may consider asking the Government to invest in acquisition of vital assets abroad like oil fields, mines, critical technology, shipping etc.

  • As export finance is linked with Bank’s PLR, some banks are charging more interest on such finances. It is suggested that the Central Bank delinked export finance from PLR and RBI and prescribed fix interest rate for export finance.  

  • Rupee invoicing is not a solution for two reasons. One, most of the products India exports are controlled by buyers market. Two, buyers are not interested in Indian Rupee which is appreciating and the transaction cost for handling Indian rupee is also very high.

  • As the country has now a buoyant foreign exchange reserves, some restrictions may be placed on the inflow of foreign funds.

  • Industries such as food processing industries are the worst affected as they do not have any import requirements. They are now not able to compete with Chinese goods in terms of price. China is maintaining a controlled exchange rate system despite US pressure. India should also move to fixed exchange rate mechanism in order to protect the domestic manufacturing sector from the onslaught of Chinese goods.

IIFT Students Visit FIEO’s Chennai Office

25 students of Indian Institute of Foreign Trade, Kolkata led by Asst. Director Dr. Ram Singh called on the Southern Region office of FIEO at Chennai on 27th September. Select exporters invited by the Federation joined the interaction and exposed the visiting students with the recent trends in international trading.

Mr. T. Pattabiraman, Consultant, Ashok Leyland Ltd., Mr. K Mani, Partner, Indus Pharmaceuticals, Mr. N Jayaraman, Director, Mount Exports and Mr. K V Ramachandran, consultant Banking & Finance, A.I. Enterprises Pvt. Ltd. were some of the prominent participants who joined the interaction.

Investment Meets

at IITF, 2007

Himachal Pradesh is partici
pating in the India International Trade Fair, 2007 as Partner State. According to Himachal Government, its Directorate of Industries is planning to hold Investment Meets during the Fair on 19th & 20th November. FIEO members are advised to join the Meets.

 

Federation of Indian Export Organisations
New Delhi, INDIA.