MUMBAI: The tiger is roaring, but the dragon may well enjoy the meal.
India's trade and industry are at the receiving end of the stellar performance of the rupee. The local currency has strengthened to a nearly three-year high against the Chinese yuan, making imports from the neighbouring country cheaper and Indian goods less attractive.
India imports everything from plastic toys and electronic components to automobile parts, power plant machineries and telecom equipment from China, running a huge trade deficit with the neighbour that in 2016 ballooned to $46.56 billion (Rs 3.05 lakh crore). In 2014, the government launched the Make-in India campaign to reduce the country's import dependence by making local manufacturing more competitive, but a strengthening rupee could now undermine that initiative, say economists.
“Chinese exports are always a concern for India, where domestic small-mid size manufacturers cannot stand out in the competition," said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India. “With the rising rupee against the yuan, the government should protect their interest, especially when we are promoting the Make-In-India campaign. It has to be commercially viable for Indian companies to buy from homegrown manufacturers over Chinese counterparts.“
On Thursday , the rupee closed at 9.48 against the yuan, a level last seen on June 9, 2014. This year, the local unit has gained about 30 paisa, or 3.07%, against the yuan compared with 3.70% against the dollar, show data from Bloomberg. On Friday , the rupee was at 9.49 to the yuan.
This fiscal year, which is into the last month, the local unit has surged against the Chinese currency but its gain remained modest against the greenback: 7.70% against the yuan vs 1.18% against the dollar.
“The rising rupee has made China exports to India cheaper,“ said Rishi Sahai, managing director at Cogence Advisors, which specialises in cross-border financing and transactions between India and China. “Indian companies will be more inclined to buy products from Chinese companies rather than any domestic manufacturers that may also lose export competitiveness in the global arena ... This does not augur well when we are talking about Make-in-India.“
The rupee has gained significantly in the past week on investor expectations that the BJP's victories in state elections will add grit to the party-led central government's policy reform processes. The local unit gained nearly 2% to the greenback, outperforming its peers among emerging markets.
Between April and January this financial year, India's imports have been around $51 billion from China, while exports to China were less than 8 billion, according to data compiled by Exim Bank. “The declining value of the Chinese yuan and other Asian currencies can result in loss of competitiveness of Indian exports and decline of India's receivable export revenues, especially for low profit margin sectors such as IT, pharma (and) textiles,“ said a spokesperson from the Confederation of Indian Industry . “The Indian MSME sec tor, which is particularly vulnerable to dynamic market forces, can lose its competitive edge in the global exports market if the rupee continues to appreciate.“
Micro, small and mid-size enterprises (MSMEs) have little wherewithal to sustain competition in the medium term, say three to six months. Indian entities in sectors like power and telecom are large importers from China.