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The
rupee strengthening more than 15 per cent in
last few months against the dollar have severely
eroded the margins of exporters and competitive
advantages. What can be done to cut the costs to
shore up the bottom lines of the exporting
companies? After all, a company can survive and
grow only if it makes money.
Manufacturing is the most affected sector. The
worst hit are export-intensive businesses like
textiles, leather, handicrafts and engineering.
And the companies are now resorting to drastic
measures, like retrenchment drives, to stay
competitive. The estimated job losses run into
several millions. According to the Federation of
Indian Export Organisations (FIEO), the apex
export body, almost 8 million jobs are likely to
be lost this financial year. And the problem may
get worse if the rupee continues to appreciate
as in recent time.
Most textile companies are opting to downsize to
cope with a loss of export income. But the
option is certainly anti-people in a country
where job loss leads to a miserable life with
almost no alternative job opportunity for the
workforce retrenched. The textile and apparel
exporters seem worse hit by the dollar’s
depreciation. The reason is obvious. More than
80 per cent of India’s textile exports are
dollar-denominated. According to the
Confederation of Indian Textile Industry, almost
500,000 jobs are likely to be lost this year.
FIEO puts the expected number of jobs lost at
600,000. According to the Tirupur Exporters
Association, almost 10,000 direct jobs have been
lost in the region and by the end of the year;
the number could soar to 50,000. The products of
textile companies are highly price sensitive.
Most garment and apparel companies supply to the
intensely competitive retail market in the US
and Europe, where sharp price hikes is
difficult. The exporters have consciously moved
up the value chain to hand embroidered and denim
products. But 60-70 per cent of the market is
still with the low-end garment exporters who
work on thin margins.
Another sector reeling under the rupee’s rise is
leather. More than 90 per cent of exporters have
a turnover less than $5 million (Rs 20 crore)
and account for half of the country’s leather
exports are in the small and medium sector
working on wafer-thin margins. The large units
with more than $15 million in revenues account
for only a fifth of the total exports. The
sector employs 2.5 million workers. And all of
them face the risk of job loss.
The rupee appreciation has also affected the
handicrafts industry badly. As reported, the
exports of handicrafts have been growing
consistently at an average rate of 16-17 per
cent over the previous years. Since June,
exports have shrunk. The Export Promotion
Council of Handicrafts (EPCH) estimates that
export of handicrafts during the current year
may decrease by 15 per cent in comparison to
2006-07. According to EPCH, almost 800,000
artisans are already jobless. However, many a
times it seems the bogey of retrenchment is only
to get the government attention and subsidies or
other financial assistances.
According to commerce ministry estimates,
exports dipped 56 per cent in handicrafts,
between 6 and 22 per cent in textile-related
sectors, and 6 per cent in leather in April to
October 2007 over the same period last year.
How can the companies face the fallouts of rupee
appreciation that is not under the control of
the country? India can’t become China or Hong
Kong that have a fixed exchange rate with
dollars for many years. But should it not be a
matter for discussion at WTO level? The parity
among the currencies of different countries must
be a necessity for globalization.
But then how can these manufacturing sectors
survive and flourish? I personally feel that the
trade associations take a very short-term view
of the competition. It talks of relief from the
government: refund of all local levies (State
and municipal), reduced interest rates on pre-
and post-shipment credit, withdrawal of service
tax applicable to all export related activities;
and moratorium on the return of principal loan
amount. And under the political pressure and
lobbying, the government yields. Chidambaram on
Thursday announced additional relief measures
for the exporters in his third such package
since July. However, it has neither satisfied
exporters’ nor the commerce ministry. The
highlight of today’s measures include a two per
cent subvention in export credit (essentially a
reduction for which the government bears the
burden), exemption of service tax for three more
services that exporters use (storage and
warehousing, specialized cleaning services and
business exhibitions) and lower customs duty on
raw materials for textiles.
It is unfortunate that they hardly talk of
productivity improvement, technological
innovation, making the products more acceptable
by improving the quality through continuous
dialogues with the employees.
Why should they jump to one point solution by
retrenchment? How much is the labour cost today
in manufacturing? Why can’t they take the
workforce in confidence to accept a cut in the
compensation for the troubled period, if they
are honest? Why can’t the trade associations and
the government agencies assist in looking into
cost reduction of various elements?
With abundance of cotton and rawhide in the
country, the cost of the major input is
certainly low unless the intermediaries are
jacking that up. The manufacturers are paying
much less to the shop floor workers than the
other Asian countries pay. For instance, in the
handicraft sector the price depends on the
attractiveness of the products that comes from
the skill of the craftsmen. Traders pay the
minimal compensations to them. Many a
manufacturers, particularly the traders are
unscrupulous. The subject requires an in-depth
study of various aspects.
What are the high costing elements in production
processes and administration? Why can’t that be
reduced instead of retrenching the workmen,
raising alarm and crying for alms from the
government? Perhaps the whole lot of the people
of the country at all levels prefers to live an
easy life with subsidies and doles instead of
finding technical solution to face competition.
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Comments: |
I
thank Indra ji for writing the
informative article “Manufacturing
Melts and Vanishing Jobs”.
The belief that manufacturing sector
is the most affected by rising
rupee, although appears convincing,
is not true. Several manufacturing
industries in India such as
petroleum products, chemicals and
gems and jewellery (they account for
a whopping 40.0% of India’s export)
rely heavily on import of input
material, which become cheaper as
rupee rises benefiting these
industries. Services, on the other
hand, have no such natural hedge.
Manufacturing industries also gain
from decreased cost of capital goods
that they import in a rising rupee
scenario. However, since
manufacturing industries usually
operate at a wafer thin margin and a
little drag on their margin causes
them to cry for help.
Retrenchment is an easy way to cut
costs as it yields results
instantly. A flagging company that
chooses not to retrench at the time
of crisis would probably bleed to
death in its search for “technical
solutions” as these solutions take
ages to deliver their benefits.
However, the need for these
solutions can not be ignored. Indian
exporters must try to move up the
value chain to dodge the impact of
currency movement. High quality
products are less sensitive to price
(I bet you remember not minding to
pay those extra bucks for a pair of
branded jeans) and in turn to
unfavorable movement in foreign
exchange. A significant improvement
in the quality could make their
products acceptable even if they
become pricey due the dollar
depreciation.
Market diversification could be
another way out. Most of India’s
export is dollar denominated, which
makes Indian exports susceptible to
movement in a particular currency.
Increasing exports to other Asian
countries, Europe, and South
American countries will take some
pressure off. Process improvement
and attaining economies of scale
could also save a lot of money in
the long run.
Indian exporters need to learn to
surmount the rupee appreciation.
Given the continuous interest rate
cuts in the U.S and higher return
opportunities in the Indian market,
rupee is expected to continue to
appreciate as more dollars flow into
the country. I hope pressure on
Exporter’s margins will only make
them more competitive. - Avishek
Suman - Dec. 6, 2007 |
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