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INDIA: Trillion Dollar Economy Status - Mixed Blessing
Analysis by Paranjoy Guha Thakurta
NEW DELHI, May 3 (IPS) - India's emergence as the 12th country in the world with a trillion-dollar economy could prove to be a mixed blessing. There are fears that it could slow down the growth of this country's computer software and information technology (IT)-enabled services as well as the export of textiles and garments.
A major factor that contributed to the second most-populous nation on the planet achieving this milestone, in April, was the sharp appreciation of the Indian rupee against the U.S. dollar.
Whereas Indian currency has been gradually appreciating against the U.S.
greenback over the last few years, what took many by surprise was the
sudden and sharp appreciation during the months of March and April when
the exchange rate came down drastically, from just under Rs 45 to the U.S.
dollar to less than Rs 41 to the dollar or a change of roughly 8.5 percent
in less than 40 working days.
By way of contrast, the rupee had appreciated by only 2.3 percent
vis-a-vis the dollar between Apr. 1, 2006 and Mar. 31, 2007 (the Indian
financial year). In this period, the Indian currency gained 2.7 percent
against the Japanese yen but depreciated by 6.8 percent against the euro
and by 9 percent against the British pound.
The appreciation of the rupee has made Indian exports more expensive in
markets where transactions are designated in U.S. dollars while making
imports relatively inexpensive. Analysts are of the view that the Reserve
Bank of India (RBI), the country's central bank and apex monetary
authority, has consciously allowed the rupee to strengthen as part of a
package of policies aimed at controlling domestic inflation. In recent
months, inflation in India, as measured by the official wholesale price
index, had threatened to cross the 7 percent mark and is currently
hovering in the region of 6 percent.
The Indian economy is currently one of the fastest growing in the
world -it has grown by an annual rate of over 9 percent for two
successive years and by an average of over 8 percent over the last four
years, both for the first time since the country became politically
independent 60 years ago. At the same time, this growth has not been
inclusive because it has bypassed large sections of the population and
swathes of territory, mainly in the east and the north. One out of four of
the 1.1 billion citizens of India live on less than one U.S. dollar a day.
"The reason why the RBI is not intervening in the currency markets to
depreciate the value of the rupee is because it wishes to cushion the
economy from the imported variety of inflation at a time when
international prices of crude oil are in the region of 65 dollars a
barrel," explains Amitendu Palit, visiting fellow at the Indian Council
for Research on International Economic Relations, a New Delhi-based think
tank. India currently imports roughly three-fourths of its requirement of
crude oil.
Palit told IPS that part of the reason why the rupee has strengthened
against the dollar is because the U.S. currency has itself steadily
weakened against hard currencies like the yen, the euro and the pound. He
said that if the RBI purchased more dollars to keep its price up, it would
increase domestic money supply and add to inflationary pressures. Palit is
of the view that a strong rupee would have a negative short-term impact on
the growth of "price-elastic' exports such as computer software,
IT-enabled services (or business process outsourcing), garments and
textiles.
During financial 2006-07, India's merchandise exports touched 125 billion
dollars, implying an annual growth of nearly 23 percent. Imports grew at a
faster 25 percent with crude oil accounting for close to one-third of the
total value of imports during the year.
Exports have doubled over the last three years. India's share of world
trade, however, still remains negligible, growing from 0.76 percent in
2003-04 to over one percent at present. During this period, inflows of
foreign direct investment have jumped from 2.2 billion dollars to 16
billion dollars (and this amount excludes retained earnings that have been
reinvested).
"I expect the rupee to continue to appreciate gradually, not suddenly,
over the next year or so and the dollar to go below the level of Rs 40,"
says Manoj Pant, professor of economics at New Delhi's prestigious
Jawaharlal Nehru University. He told IPS in an interview that the
government and the RBI wanted to "send a clear message to exporters that
they could not expect to continue receiving preferential treatment".
While there is considerable concern among economists that the Indian
economy is "over-heating" and that the benefits of economic growth have
not been evenly distributed among all sections of the population, others
are optimistic about the country's "growth story". A report prepared by
Credit Suisse bank pointed out that over a year after their economies
crossed the one trillion dollar mark, eight out of ten countries witnessed
bullish trends in their stock markets.
The report added that the combined wealth of the estimated 20 million
non-resident Indians is currently more than one trillion dollars, which is
the gross domestic product of the entire Indian economy.
The recent rise in the rate of growth of the Indian economy has been
fuelled by a sharp rise in manufacturing output and the services sector.
Among the services that have been growing very fast are IT-enabled
services and computer software. These are the segments of the economy that
are now likely to be adversely impacted by the appreciation of the rupee.
"Companies that were exporting software and IT-enabled services were
shocked by the sudden rise in the value of the rupee vis-à-vis the dollar
because the bulk of their business was designated in dollars," points out
D.K. Joshi, director and principal economist, CRISIL Ltd. (earlier known
as Credit Research and Investment Services of India Ltd.). In an interview
with IPS, Joshi added that the "profit margins of companies exporting IT
services would be squeezed and they would certainly fight back by
increasing their billing rates in dollar terms."
Even if the rate of growth of computer software and IT services exporting
firms slows down, analysts IPS spoke with were reasonably optimistic that
the deceleration brought about by the sudden strengthening of the rupee in
relation to the dollar would be a passing phenomenon.
India's commerce minister Kamal Nath has set ambitious export targets of
160 billion dollars and 200 billion dollars respectively for the country
over the next two years. He told journalists on Apr. 19 that the Indian
government had taken into account the likely slowdown in the U.S. economy
while setting these targets.
India's trade basket, he said, was quite wide, claiming that the expected
slowdown in the U.S. economy would not have a major impact on the country's
exports.
(END/2007)
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