The dark cloud hanging over India’s economy from the rupee’s rout is not without a silver lining.
The currency’s double-digit drop against the dollar this year is helping the nation’s services exports, according to HSBC Holdings Plc’s chief India economist Pranjul Bhandari. So much so that the share of services exports, which mainly comprise software, has climbed to 7.3 per cent of gross domestic product in June from 6.8 per cent in March 2017, she said.
That growth is reflected in the stock market, where the year-to-date gains for information technology stocks have outpaced the broad market index. While the MSCI India index is up about 4 per cent, the information technology index has jumped nearly 33 per cent.
It’s also helped to underpin the world’s fastest growth rate of 8.2 per cent in the June quarter given the services industry’s 55 per cent contribution to the overall economy.
The boost to services exports from a weaker currency is in contrast to overall shipments, which historically haven’t benefited much from a weaker rupee.
The rupee is Asia’s worst-performing major currency so far this year and that comes amid a global trade war that threatens exports. If anything, a slide in the rupee has ended up inflating India’s import bill.
According to Bhandari, the main deterrents to goods exports, which account for 60 per cent of overall shipments, are domestic bottlenecks, in particular the hit from the cash ban and the chaotic introduction of a nationwide consumption tax. Global growth and exchange rates are also factors.
“Exchange rates matter, but the least of the three, because India’s import content of exports are rising,” Bhandari said.
“On the other hand, the exchange rate matters much more for services exports,” she said. “In that sense, 2018 is special. World growth is up and the exchange rate is more competitive than before.”
Source: economictimes.indiatimes.com