The steep and rapid appreciation of the rupee in recent months has affected all exports. On textile products, the impact is relatively more serious because of the very low import intensity and high export orientation of the industry. While the currency has been appreciating gradually for several years now, there has been a dramatic change from March 2007. In the last four months, the rupee has appreciated by an average of more than 2% a month.
Exporters of textiles and clothing are currently executing orders they had obtained before March at a loss. And new orders are hard to come by. Our products are out-priced by competitors, who have the benefit of lower appreciation or actual depreciation of their currencies. A recent study by the Confederation of Indian Textile Industry shows that even a stagnation in textile and clothing exports can lead to the loss of 6 lakh potential additional jobs in the current year alone. Thus, export deceleration is an issue that affects the economy as a whole.
Currency appreciation is not the only problem that our exporters face. Weaknesses in infrastructure, power costs and unworkable labour laws have already impacted our competitiveness. But the industry has learnt to live with these problems and still managed to grab increased marketshares in western countries. But the rupee?s appreciation could prove the proverbial straw that broke the camel?s back. That the rupee appreciation has been accompanied by a large increase in interest rates has made the going even tougher for exporters. The best solution for saving exports would be to allow the rupee to depreciate.
If the appreciation of the rupee cannot be arrested, the other option is to compensate exporters for the loss arising from the appreciation. Subsidising exports to neutralise the impact of currency appreciation would not be consistent with WTO provisions. In this context, the only viable solution is to moderate the cost of exports. Industry has to take measures to cut costs. But there are areas where the government has a role to play. The government has itself estimated the minimum incidence of duties at state and local body levels for all products at 4% and, therefore, have introduced an additional customs duty of 4% on imports in order to match this levy.
Duties levied by state governments and local bodies on textile and clothing products and their raw materials, which are not refunded to exporters, are estimated by the industry at about 7%. Currently, drawback rates are worked out on the basis of customs and excise duties levied by the central government on exported goods. This is because drawback is paid to exporters by the central government. State-level duties are not refunded to exporters because there is no mechanism in place for the central government to recover the amounts involved from the relevant state governments.
The package worked out by the ministry of commerce & industry seeks to increase the drawback/DEPB rates by 5%, which will at least partly neutralise currently non-refunded duties at state and local body levels. Refunding these duties will be consistent with WTO provisions, since all duties and levies borne by exported goods can be refunded to exporters. Other elements of the package such as reducing interest rates on packing credits and premium for ECGC coverage, converting Exchange Earner?s Foreign Currency Accounts to an interest-bearing instrument etc., are also within the authority of government and consistent with international obligations.
The package has been worked out carefully by the ministry, taking into account the need to compensate exporters for the huge appreciation of the rupee without running the risk of allegations that exports are subsidised. The issue that remains unresolved is how to compensate 100% Export-Oriented Units, which are not eligible for drawback. They are equally affected by the currency appreciation. The package may not be the best or complete solution to meet all the challenge of currency appreciation. But it is a workable compromise in the given circumstances.
?The writer is secretary-general, Confederation of Indian Textile Industry
