Last week, I caught up with my friend Raju P, who runs a mid-size garment export business out of Mumbai. A few minutes of conversation later, it struck me how the rising rupee was hurting smaller exporters like him.
This is booking time for winter season orders from North America and Europe, particularly for someone like Raju, who manufactures sports and winter wear. With the dollar in the Rs 41-42 range and the rupee up almost 10 per cent since his last orders were signed, he feels as if the proverbial rug has been jerked out from under his feet.
"It's not just the rupee; add another 5 per cent or so for rising costs as well. Everything from the cost of yarn to power has risen," he says. Worse, he says, buyers continue to demand lower prices. "To give you an idea, a shirt piece that could be exported for $3 five years ago now goes for around $2.20, give or take," he says.
The price pressures could have been managed, with productivity increases, as they should consistently be. But that's if only there was no China to reckon with. As it happens, there is not just China but other hungry countries in the region as well. And Chinese manufacturers, to put it simply, continue to make more and charge less. And the yuan is being held.
Over the last month, garment and textile exporters, from Ludhiana to Tirupur, have been complaining loudly about the appreciating rupee. Many have demanded, somewhat bluntly, that the government intervene to halt the appreciation and bring back the rupee to where it was. My friend Raju too feels similarly.
The larger and smarter players are safe (somewhat relatively) because their forex exposures have been capped. Many claim that they are even striking new contracts at slightly higher rates, maybe 3 to 4 per cent. That's possible, particularly for some kinds of garments. Though despite the hedging and the new orders, some industry folks are predicting a 20 per cent volume drop in June and July.
Most garment manufacturers Business Standard has been speaking to say the hedging saves them from an immediate catastrophe but things are not so clear in the medium term, which of course could be anything from three weeks to six months. But smaller players are obviously hit. Tirupur alone has thousands of them.
There are several debates at play. Should the RBI maintain the rupee at earlier levels or maintain its current strategy of managing inflation by not stepping in to buy dollars? The political answer is quite clear.
And there are several expert views on these pages, including one, which suggested that RBI Deputy Governor Rakesh Mohan should be sent to China to understand their exchange rate management. Raju says the same, though he did not take names.
My questions are a little more fundamental. First, why or rather how come no one saw this coming? And second, why does industry always get so comfortable so as not to be prepared for shocks such as this?
I have no expert view on this first question, except to reiterate that no one, at least seemingly, had a clue. One day it was Rs 45 and thereabouts and the next it had zoomed to Rs 41. The rise was not accompanied by months of dire warnings, predictions and debates. Everyone assumed that the Reserve Bank would continue to intervene as it always has.
So, simplistic as it may sound, that's lesson number one. The biggest surprises in the financial markets come when most people expect them least. The stock markets have done that a few times in the last year already. And the forex markets are now following.
Second, we have an uncanny knack of settling into comfort zones. It strikes me as a little unusual that Indian garment exporters, who are exposed to one of the most brutally competitive businesses in the globalised economy, can be so unprepared for something basic like currency fluctuation back home. Let me answer that as well. They just took it for granted.
They are not alone. Most exporting companies are in the same boat, including of course the IT majors. Since currency, the one big variable, has been actively managed by the RBI for some time now, why not safely assume that the RBI would continue to do so and keep the export registers ringing?
This possibly can be a long-term strategy for export-led growth. But few seem to have connected the problems of inflation and/or interest rate management with the possible solution that the RBI did go for, at least for now. The net result is that we are in a business environment that suddenly seems a little treacherous. Contrast that with the (minus inflation worries) gung-ho, export-led confidence that India Inc enjoyed until only recently.
So, is this all gone? Not quite. In adversity, there is opportunity. While Raju is having to do some fire fighting, my friend Vijay, a fabric importer, is a little more at ease. He says that garment manufacturers who are importing fabric (up to 65 per cent of cost) from China can weather the currency shocks.
Because while China can be threat, it can be an ally too. Meanwhile, his group is venturing into bio-diesel in a big way. Where, as I see it, the risks are less financial and more political. But that's another story.
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