The depreciation of the Indian currency may have cheered exporters, but in the long run it could bring more bad news than good.

By V. Shankar Aiyar

That the rupee would slide was only to be expected. What is surprising is the clamour and the whoops of joy that have accompanied it. True, the devaluation is expected to bring some cheer, but that will essentially be short-lived. In the long run, the losses will far outweigh the gains. Worse, the depreciation, coming as it does in the middle of a political crisis, threatens to aggravate the current economic crisis.

First, the reasons for joy. A depreciation of 8.8 per cent is good news for exporters, particularly those in commodities trade and the software business. Last year, the software industry earned nearly $1 billion, or Rs 3,546 crore, in exports. At current exchange rates that would translate into Rs 3,680 crore -- a straight jump of almost 9 per cent in rupee profits. A second reason is that the current fall in the rupee makes the costing of Indian exports somewhat more attractive to foreign importers.

Again, Indian manufacturers, who face cut-throat competition from imports, will derive a price advantage; thanks to the depreciated rupee, imports will now be more expensive. The steel industry, for instance, is expected to be among the biggest beneficiaries on this count. The costlier dollar has suddenly made Indian steel cheaper than the sponge iron and scrap dumped by the Confederation of Independent States and South-east Asian countries.

Another gainer will be the hotel industry, which has been at the receiving end of the downtrend with dropping occupancy rates (last year most hotels reported less than 60 per cent occupancy) and dipping bottom lines. With as much as two-thirds of the industry's income coming in foreign exchange, the slide in the rupee's value will prop up profits. For instance, Indian Hotels of the Tata Group earned forex worth Rs 367 crore last year. The 9 per cent higher value of the dollar will, naturally (given a similar performance), boost its earnings. The same is true for those in the garments and textile business.

That, however, is where the gains end. It is doubtful whether the rupee fall will push exports up from the pathetic 4.2 per cent it has registered in the first six months of this fiscal. The depreciation, many experts believe, is more in the nature of a temporary price advantage and does not necessarily translate into higher exports (see graphic). Raghavendra Jha, an economist with the Indira Gandhi Institute of Development Research, believes that "exchange rates don't have much to do with exports" . "The Japanese were exporting even when their currency was appreciating. Growth is possible only in price sensitive areas like garments. What we need is capacity to export. The hurdles in export growth are on the supply side, primarily infrastructure bottlenecks like those in ports."

This in effect means that, given the state of our infrastructure, mere tinkering with the exchange rates will not help exports. There are other costs like energy and transportation within the country that are among the highest in the world. Says Ashok Narayan, a leading cashew exporter: "Costs also increase internally to reflect a weaker currency. So your input costs increase partially, eroding the price advantage. Whether exports will increase is rather doubtful. At most, you will stay on par." Worse, there is an impression that depreciation will afford protection to domestic industry. Says S.K. Shelgikar, adviser to the Videocon Group: "The perception is that, with an expensive dollar, demand will pick up in domestic industry as imports will be curbed. This is a misplaced perception. There is no reason to believe that overseas suppliers will not discount the depreciation. You cannot take for granted that higher import costs will necessarily lend protection to Indian industry." Besides, the costs that are dampening growth in India will only rise with the depreciation of the rupee.

The slide will also hit new projects. First, in terms of the cost of financing -- which in infrastructure and sectors like telecom depend critically on foreign funds and the cost of the capital import itself. For instance, Indian companies, which recently raised around $3 billion from overseas markets, will have to earn additional rupee resources to pay back the amount. Says Shashi Ruia, chairman of Essar Group: "Depreciation is a double-edged sword. You might earn on exports but, on the other hand, cost of money raised abroad has also gone up." Little wonder, blue-chip companies like BSES, Larsen & Toubro, Grasim and SAIL have put off plans to raise funds abroad. Those who planned to raise equity, like gail, too have shelved their plans to avoid being hit by the currency crisis. And the cost-conscious Reliance Industries has pruned by $300 million the money it was to raise abroad for its telecom venture. The cost of finance apart, new projects -- and there are precious few nowadays -- themselves will cost more because of the steeper prices of capital goods. Last year, for instance, capital goods imports cost the country Rs 32,675 crore. It is now likely to cost over Rs 35,640 crore.

The depreciation is also bound to affect the fertiliser sector which imports the bulk of its raw materials: phosphoric acid, ammonia and sulphur. The increase in the cost of the dollar will either be transferred to the farmer or will add to the burgeoning subsidy bill that the budget has to manage. Where the prices of inelastic goods -- like defence equipment and petroleum products -- are concerned, the effect could be more drastic. Says Deepak Parekh, chairman, hdfc: "The depreciation, though expected and with some positive tilt, will have a major impact on the country's petro bill."

India's import bill for petro-products last year -- at an exchange rate of Rs 35.46 to the dollar -- was Rs 35,737 crore (see graphic). Even if we import the same amount of petroleum products this year, the import bill is expected to exceed Rs 38,881 crore. Given the fact that India's petroleum-related imports have been galloping from 20.7 per cent to 26.1 per cent of total imports (or from $5.9 billion in 1994-95 to $10.08 billion in 1996-97), the impact on the inflation curve will only sharpen. And this, according to Jha, will affect the common man, particularly the vulnerable sections who are not covered by indexation.

There are, however, some like Uday Kotak, vice-chairman of Kotak Mahindra, who believe that even the inflationary pressure is a plus point. "You are talking about growth economics not deflation economics. This was needed to put growth back on track. We need depreciation to kick-start the economy," he says. A.V. Rajwade, forex expert, echoes Kotak. "Without this, a turnaround would be difficult."

Others are not so sure. Most corporates believe that given the resource scarcity faced by the country, its status as a net importer (the trade deficit is expected to be around $6 billion in 1997-98), the infrastructure bottlenecks, high energy costs (11 cents per kw/hour, among the highest in the world), the external debt (which, thanks to the depreciation, is up from Rs 3,24,000 crore in March 31 to Rs 3,48,000 crore now) and cost of accessing money, depreciation cannot be all that good news.

There is genuine fear in some sections that exports will not pick up despite the depreciation in the value of the rupee. First, because the South-east Asian currencies have depreciated much more. For instance, the Thai baht has slid by over 36 per cent between June and November, while the rupee has depreciated by just about 9 per cent. Second, even the export revival, if it comes, will take its own course and time. This, they feel, would pile up pressure on the balance of payments, and eventually on the reserves.

While the Reserve Bank of India says that it has adequate reserves to cover imports for eight months, there is apprehension that the value of the reserves will drop. As exports are low -- 4 per cent last year and no better this year -- and imports are growing, there are fears of a repeat of the 1991 crisis when the country had to pledge part of its reserves (47 tonnes of gold) with the Bank of England as collateral for a $200 million loan.

But even gold is not a good hedge in the global arena anymore, thanks to a fall in its price. As it is, the value of gold reserves has dropped from Rs 15,564 crore in June 1996 to Rs 14,054 in June this year. Add to this the fall in domestic bullion prices -- down from Rs 60,250 per 10 tola biscuit to Rs 50,000 in October, and from Rs 50,000 to Rs 47,500 in November as the global price plunged to a 12-year-low of $297 per ounce in the wake of speculation and news that some central banks and the Swiss banks would be offloading part of their tranche in the open market. Interestingly, although a depreciated rupee would normally act as a dampner, gold crazy Indians are not likely to buy less gold. This is primarily because gold in India is not a hedge against inflation; nor is it, in the strictest sense, an investment.

On balance, the depreciation could, at best (given the exigencies of globalisation), help India stay on par with competitors. It is a classic Lewis Caroll scenario. You have to do all the running you can to stay at the same place. To get anywhere, you will have to run twice as fast. The question is: can a lame-duck regime do it?

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