Exporters gain in rupee fall, but trade loses


The rupee diving to an all-time low of 69.10 on Thursday is likely to worsen macroeconomic situation along with adding pressure on the monetary management.

Economists told that while a weaker rupee would help exports, a lot of the gains could be neutralised due to the rise in import bill, particularly the oil bill.

D K Srivastava, chief policy advisor, EY India, sees current account deficit (CAD) widening further if the trend of free fall in the rupee value continued. He expects it to rise to 2.5% of the GDP this year compared with the 1.9% of the GDP last fiscal.

"The current account deficit is close to 1.9% of the GDP, if this (slide in rupee) trend continues, it (CAD) will be definitely be 2.5%. Historically, we have gone to even higher levels. Our earlier study has indicated that a CAD of up to 2.5%-2.6% of the GDP could be a sustainable level, but beyond that it would become unsustainable for us," he said.

Last fiscal had seen CAD increase to 1.9% of the GDP from 0.6% in FY17 due to soaring import bill. The swelling in the import bill was mainly due to higher spending on oil and gold purchases.

The trade deficit was also up by 42% to $160 billion last year compared with $112.4 billion in FY17. In May, it was higher by 5.6% at $14.6 billion compared to the trade deficit a year ago.

Srivastava said the positive effect of a depreciated rupee on exports would be marginal.

"Depreciation in the rupee will have only a marginal positive effect on exports because the extent by which the depreciation would offset cost disadvantages to Indian exporters would be limited and so the margin adjustment requirement would be large," he said.

On the other hand, he expects the jump in imports to be neutralised because a large part of imports meet the needs of exports.

"Imports would increase in value term but because these are related to crude prices and large part of India's exports consists of refined petroleum products – in fact some imports are only needed for exports of refined petroleum products which increase in value. Therefore, partly the impact of increase in the crude prices would be neutralised and partly the increase in import value will also be neutralised," said the EY economist.

Richa Gupta, senior director, Deloitte India, said the twin burden of a weaker rupee and firm commodity prices will put added pressure on monetary management.

"Sliding rupee increases import bill. And with the prices of oil and other commodities still on the higher side, it will add burden to the import bill and therefore puts added pressure on monetary management," she said.

According to her, any impact of the downslide of rupee on trade deficit or CAD would depend on how exports perform.

"We will have to see how the exports perform to gauge whether it would impact trade deficit or CAD," she said.

Various research reports have forecast the world demand to grow this year but it has to be seen how India responds to the current global environment of trade and investment war.

Srivastava said to arrest the slide in the rupee, the government would have to release more dollar from the foreign exchange reserves; "this will deplete our forex reserves but arrest the decline in rupee".

He said the government could use this opportunity to push exports by expediting "effective" zero rating by "releasing the taxes paid under goods and services tax (GST) by exporters that appear to be held back".

Srivastava said the falling rupee would move the contribution of net exports to GDP growth, which has lately been low or negative, further in the negative direction.