The Rupee depreciation catch: Import intensive exports likely to take a hit

The depreciation in the value of the rupee may be good for the country’s export sectors, but there’s a vulnerable sub-category that’s adversely impacted: labour-intensive export sectors such as gems and jewellery, pharmaceuticals and electronics that are highly dependent on imports of inputs.

Usually, a depreciation in the domestic currency is expected to give a boost to exports, as traders get more local currency when they convert the export proceeds, but importers, on the other hand, need more local currency to buy the same quantity of imported inputs.

Sectors such as gems & jewellery and electronics that have a high import intensity — the value addition of imported items as a proportion of the value of items that are subsequently exported — are faced with higher input costs and lower demand as they are forced to pass on some of the increase in cost of imports. Since the beginning of the year, the rupee has depreciated by 2.6 per cent to a near all-time low of Rs 76.5 as against the US dollar.

“Overall electronics exports are dependent on imports as local value addition in the sector is minimal,” said Vinod Sharma, MD at Noida-based Deki Electronics, which manufactures capacitors. Sandeep Narula, chairman of the Electronics and Computer Software Export Promotion Council, said that manufacturer-exporters would be hit by the depreciation of the currency since 60 to 80 per cent of the exports from the sector are import-led. Trade issues with Russia and Ukraine are also set to impact the sector as both countries are important destinations for electronics exports such as mobile phones. Narula added a significant proportion of exporters in the sector do not hedge their exposure to currency fluctuations.

“Even if the Indian exporters would have hedged the currency against depreciation, our experience is that 30 to 40 per cent of importers may not have opted for risk covering, resulting in higher import cost,” Narula said. Electronics exports accounted for 4.9 per cent of India’s exports in FY21.

The gems and jewellery sector is facing a double whammy as gold prices have risen sharply while the rupee has depreciated. Gold demand has fallen sharply as the Russian invasion of Ukraine has sent prices soaring to Rs 52,230 per 10 gm on the MCX on Monday. Gold is up 8.8 per cent since the beginning of the year.

“(Jewellery) manufacturers are not getting orders because the price rise is huge,” said K Srinivasan, chairman and managing director at Coimbatore based Emerald Jewel Industry, which manufactures and exports gems. Srinivasan said both domestic and international consumers understood that prices had shot up due to the Russia-Ukraine crisis and were delaying purchases. Srinivasan noted that many manufacturers were hedging both their exposure to higher gold prices and the devaluation of the rupee, but said smaller manufacturers may not be in the position to do the same.

Exports from the gems and jewellery sector had an estimated imports intensity of 63 per cent in 2014, according to a working paper by the Institute for Studies in Industrial Development (ISID). Therefore, imports accounted for almost two-thirds of the exported value of gems and jewellery in FY2014 according to the ISID working paper. Gems and jewellery exports accounted for about 9 per cent of India’s exports in FY21.

Petroleum product exports are also highly dependent on imports. However, the relative inelasticity of the demand of petroleum products allows exporters to pass on the impact of higher input prices, according to experts. The import intensity of petroleum product exports was estimated at 91 per cent in FY14 by ISID.

India’s pharmaceuticals exports are also heavily reliant on imports, particularly from China. The ISID estimated import intensity of 39 per cent in pharma exports in FY14. Pharma exports were 6.6 per cent of exports in the previous fiscal.

Commerce Minister Piyush Goyal on Monday said he did not think that a weak currency supported exports at an Associated Chambers of Commerce and Industry of India event. “I believe a strong currency reflects the strength of a nation and will always be good for exports, because India, at the end of the day, is a net importer of goods,” he added.

Biswajit Dhar, professor at Jawaharlal Nehru University, said high-tech manufacturing including electronic goods as well as automobile and automobile component exports would be hit by the depreciation in the rupee as exporters would have to pass on increased cost of imports which would affect demand. “There is going to be a cascading effect on the manufacturing sector,” Dhar said.

Experts said any benefit to exports from a weaker rupee in high value-addition sectors would also depend on the movement of currencies of nations that India competes with in such sectors. The currencies of most developing countries, including competitors such as Bangladesh, Vietnam and Indonesia have also weakened this year but to a less extent than the rupee. However, a general slowdown in the recovery of global trade due to the Russia-Ukraine conflict is a key concern among exporters.

Sunil Kumar Sinha, principal economist at India Ratings, that research showed that there was a significantly stronger correlation between a rise in global trade and Indian exports as compared to the correlation between rupee depreciation and an increase in exports.

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