Free fall helps but Indian exports need more than just a cheap Re

Sep 11 2013, 11:01 IST
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SummaryThe upside of the rupee's slump is an export boom that sets the economy straight, right? Wrong.

the zones soared 13 times over six years to reach $66 billion in 2010/11, about 17 percent of India's $384 billion of exports that year.

But in 2011, the government slapped an 18.5% minimum acceptance tax (MAT) on future profits — in effect, killing the goose that laid the golden eggs, exporters said.

The rapid exports growth from SEZs slowed to a crawl. New investment tailed off, data from polling group Ipsos shows.

Orient Craft threw in the towel two weeks ago, surrendering its SEZ license. It was not alone: just 173 of 576 approved SEZs are operating today. Close to 60 developers, including Reliance Industries, a major exporter, have given up licenses.

In February, an Ipsos survey of 400 companies operating in SEZs found 62 percent of respondents had suspended plans to invest further in the zones, while 75 percent thought the tax hurt India's reputation.

Jain said the zones were now economically unviable for manufacturers, strong words from someone who is deputy chairman of an industry chamber promoting exports from SEZs. "No promoter will ever think or advise the next generation to invest in SEZs or any such project for many years," Jain said.

Exporters that do not depend so much on imports are benefitting from the weak rupee. That includes Orient Craft; its 15 factories in the Delhi area have the fullest order book in years.

Textiles and pharmaceuticals, which exported $33 billion and $15 billion respectively in 2011/12, are set for a boost. Service industries, including IT outsourcing, which account for around one-third of India's exports, might also experience gains.

Reflecting that, India's IT stock index rose 36% from the start of May through Friday. Some players though, including IT solutions company Mindtree, see problems ahead.

"Our largest cost is people cost, and with the ... rupee the way it's going, inflation will go out of control and obviously salary costs will also go out of control," said Rostow Ravanan, Mindtree's chief financial officer.

For others, there is a sense of opportunity lost. In raising rates to try to stem the currency rout, the central bank made it harder for companies to expand quickly to meet new orders.

To help, the finance ministry last month increased a subsidy on interest rates on loans for exporters, but Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry, said high taxes are the main export drag.

Some relief may be coming there, too.

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