During the first week of the New Year 2010, the Indian Rupee touched a new high against the US Dollar to reach 46.22 per Dollar. Although this was a good New Year greeting from the Rupee to importers in India, it may not have pleased the exporter so much. Since then the Rupee has been hovering consistently around 46.2 Rs. values and in the recent weeks, it has appreciated overall. You may check the latest conversion rate here.
In this article, we will concentrate on the Indian textile exporters. Hardly anyone understands the variation in foreign exchange rates better than the Indian textile exporting community as their bottom lines routinely depend on this factor. With globalization and opening of global textile markets under the World Trade Organization, this variation has been affecting their businesses more frequently than ever before. In the recent time also, the appreciation of the rupee against the USD, a currency widely used in trade from this part of the world, has hurt the textile exporters. According to Apparel Export Promotion Council, the adverse effect on margin has been in the range of 8 to 10%.
The variation in exchange rate that adversely affects the textile manufacturers’ profits may be due to seeming unrelated factors such as increase or decrease in capital inflows in the form or Foreign Direct Investment or Foreign Portfolio Investments or RBI intervention as the case may be. The woes of the exporters aren’t limited to the rise of Rupee against the USD. Domestic inflation and rising raw material prices exert further strain on already dwindling profits. For instance, there is a rise in cotton prices globally which makes the procurement of good quality raw material, expensive.
Simple calculation of currency realization per meter of exported fabric will reveal the loss or gain of profits with unit variation of the foreign exchange rate. But the real question to ask is why the Indian textile exporters are so dependent on these factors for his survival? A simplistic explanation is that they are competing on price. Of course, technically any exporter will get affected by rising of domestic currency value but for this variation to become a life threatening issue, is a matter of high concern.
The roots of this issue lie in the formulation of corporate strategy and business strategy and have to do with value proposition of the company. Companies which failed to either innovate or move up the value chain in the long run, so that they can command a premium on their product rather than playing a volume and price game, often find themselves in this situation.
Traditionally, China has been known to compete heavily on price and it successfully dragged manufacturers from other countries such as India, Bangladesh etc in the price competition. It would be unfair to blame everything on the Chinese because fact of the matter is that we had to give in, for the lack of a stronger value proposition.
Supply and demand factors which determine the price of raw cotton which fall under the broadly traded commodities are beyond the control of an average exporter. Although India has strong credentials as far as installed manufacturing capacity and past performance of textile exports in concerned, a lot more remains to be done in terms of having control over the market, which is an agreeably challenging task.
Macroeconomic factors or indicators such as inflation and agricultural yield as a percentage of GDP may not be influenced directly by individual textile exporters but business can surely do well to reorganize their value proposition. In the long run, two solution that will help businesses sustain themselves are innovation and moving up the value chain. As to how exactly that should be done, we will present our suggestions in the next article.
As for short term remedies to counter strengthening rupee and rising domestic inflation, keep watching this space.
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