Widespread disruptions have been caused by the rising rupee. Even 39 rupees will fetch a dollar. This has seriously impacted the export prospects of many industries, in particular, textile, garments and software.

Exporters get their sales proceeds in dollars, which, with the rising rupee, fetch lower number of rupees. Viewed alternatively, the exporter has to quote a lower rupee price to match the US market demand at a given dollar price.

While a strong rupee may delight the hearts of certain sections of markets such as importers, it brings tears to the eyes of exporters. Particularly, it affects textile workers in Coimbatore, garment industry workers and all their dependents. While initially the garment industry of Tirupur was trying bravely to face up to the rising rupee, it has now become fully aware of the impact.

The offsetting tax concessions proffered by the Government of India have been rather meagre compared to the 10 per cent hit in realisation arising from the rupee appreciation. The profit margins are too small to absorb the decline.

Chain reaction The resulting disruption in Tirupur’s exports should raise serious concern both at Delhi and Chennai. The Tirupur garment industry is an employment magnet for thousands of workers from Tamil Nadu and Kerala. The fall in earnings and resultant layoffs will cause a severe decline in the number of jobs in Tirupur.

More importantly, it can cause a chain reaction by creating a fall in demand for the yarn produced by the spinning mills of the State. The net effect may well be serious lay-offs in the textile mills of Coimbatore, which have already faced a decline in profitability for their exports of yarn arising from the rupee appreciation. The situation is grave and calls for concerted action by the RBI, Government of India as well as Government of Tamil Nadu. The RBI may well say that its hands are tied because of the impact of rising capital inflows and the costs, including inflationary impact, involved in keeping the rupee down. True, the RBI has been reacting to the inflationary consequences of its intervention in the forex market, which involves pumping in rupees to purchase dollars.

The costs of intervention are, no doubt, considerable, but we have to make a cost-benefit analysis of the two options. Is it cheaper for the RBI to intervene and accumulate dollars in its kitty to be invested abroad, albeit at a lower interest, or is it cheaper to offset the costs of a rising rupee by tax concessions and the like, or to face the loss of jobs and resulting disorder in the rural and urban areas?

Competition threat It is true that the RBI has a difficult job on its hands. The choice between different options is difficult, especially considering the fascination with India’s stock markets for foreign investors. But, the basic question arises, however, from the competition to India’s industry from elsewhere in the world.

China, with a currency that it keeps deliberately down, at least not appreciating, Vietnam, with its weak currency and abundant cheap labour, Bangladesh also with a weak currency and robust tax offsets — these offer alternative sources of supply in the garment industry. The question should be looked at holistically and cannot be solved only by looking at the costs of RBI’s intervention and inflation control.

It is time the Governments of India and Tamil Nadu look at various tax benefits they can offer the affected industries to offset the rupee appreciation. The costs of these tax offsets have to be weighed against the costs of unemployment, labour unrest and tax revenue losses arising from lower business turnover.

China beckons It is a pity that even the minor concession offered with regard to service tax itself has been whittled down. Delhi has also brought the software industry under the Minimum Alternative Tax and Fringe Benefit Tax. On the one hand, Delhi is talking of an IT boom and a garment industry boom; on the other, it is doing its worst by looking kindly at rupee appreciation and tax changes that hurt the industry.

In this context, the option of a dedicated special economic zone (SEZ) has been suggested. But, there is no SEZ in sight for garments. The dedicated SEZ for software does not offer benefits for existing software units. They have virtually to start a new software company to relocate in the SEZ.

Perhaps, they may as well consider relocating in China with more efficient SEZs. This is happening already. A number of India’s software majors are establishing themselves in China. While China’s initial steps are still small, they may well be the harbinger to a long march, unless India takes care to discipline its currency as well as tax systems to be more friendly to exporters.

Suggestions have been made that software and the garment industry should refocus attention on other markets. Although there is some merit in this, I am afraid this is counsel of despair. The affected industries have gained their markets mainly based on demand in the US, which will be sustained only if prices and services are at reasonable levels. A new branding exercise is called for to refocus attention on Europe and this will not be as productive as the US.

Concerted action The crisis to our export industries resulting from rupee appreciation calls for concerted action at the highest level. There is no point in the Government of India declaring that the RBI is independent and cannot be interfered with. This issue is far more important than the 123 agreement on the nuclear deal. The number of jobs at stake and the export volumes that are affected call for a multi-pronged approach that should attempt to address the fundamental problems.

It is true that India’s industries should become more productive. But, a sharp blow, such as the appreciation of the rupee, can be countered only by a marked structural adjustment of the industry. That takes time and investment. Required funds have to be provided and at reasonable rate of interest. Government of India must compensate the exporters for their handicaps in infrastructure, such as ports, power shortages and logistics.

Tax sops are inevitable. It is far harder to restore India’s export industries than to bear the cost of tax sops, which may be evolved in a manner that is WTO-compliant. The alternative is clear — to let the rupee fall to a reasonable level to allow industries to compete with countries such as China, Bangladesh and Vietnam.

Sometime ago, I had occasion to quote Singapore’s venerable leader Lee Kwan Yew, who had pointed out in his Jawaharlal Nehru Memorial Lecture of 2005 at New Delhi that no emerging economy has succeeded without its manufacturing sector becoming competitive globally (Refer article dated July 9, 2007).

He had pointed out the importance of a weak currency policy, which had been practised by most East Asian countries, such as China and Japan. Is it not time to heed the voice of experience?

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