Rising Rupee Casts a Shadow
SOURCE: Bloomberg News | The Washington Post - November 09, 2007
Friday, November 9, 2007
GURGAON, India -- In a brightly lit basement factory, hundreds of shirts, beaded party dresses and embroidered skirts are stitched every day against the rhythmic hum of sewing machines. The tailors, most of whom are migrant laborers from impoverished villages, sit in rows marked by signs saying Macy's, J. Crew and Banana Republic.
The work floor buzzes at Orient Craft, an export company whose business has grown tenfold in the past decade. But nowadays, tension is written across workers' faces. In the past four months, about 3,000 workers have been dismissed because the company's revenue has plummeted.
Orient Craft is among a raft of exporters feeling the pinch recently because of a change beyond their control: The national currency, the rupee, has appreciated to unprecedented levels against the dollar, meaning that Indian products are generally more expensive for foreign buyers.
This year, foreigners have been showing broad new interest in investing in India and its bullish stock market. By buying huge volumes of rupees for investment, they have put upward pressure on the Indian currency, helping to drive it 12 percent higher since January. At the end of 2006, $1 was worth more than 46 rupees; today it's worth about 39 rupees. (The rupee is stable against the euro and other currencies.)
The story of the strengthening rupee, dubbed by Indian newspapers as the "raging" or "roaring" rupee, has cast a long shadow on the export industry. According to the Federation of Indian Export Organizations, 4 million Indians have lost their jobs this year, and the number is estimated to rise to 8 million by March. The worst-affected exporters are those producing garments, leather goods and handicrafts for U.S. customers, as well as companies providing information technology services to the United States.
"The dollar is weakening against the alarming appreciation of the Indian rupee. We are getting fewer rupees for the same amount of dollars," said Sudhir Dhingra, chairman of Orient Crafts, which exports $180 million in goods annually. "It is painful to sack people. But it is better to lose your finger than let go of your hand. I don't have the luxury of keeping them. My competition is driving me nuts. My customers are not ready to pay more."
Eighty percent of Orient Crafts' exports are destined for American retailers, including Ralph Lauren, Dillard's, Ann Taylor and Liz Claiborne. In 1993, a Liz Claiborne representative trained Dhingra's workers and converted his sleepy cottage-industry-style business into a modern export powerhouse. Today, Dhingra worries that not just China, but Cambodia, Vietnam and Sri Lanka may take away his clients.
Analysts say that Indian exporters operate on wafer-thin margins and are unable to sustain their businesses in profits drop. In the southern town of Tirupur, a hub for companies that manufacture T-shirts for such retail stores as Target and Wal-Mart, thousands of people have lost their jobs recently. One exporter said it is suffering heavy losses to meet orders for Christmas. But the firm said it is following through with the orders so as to not spoil relations with long-time clients.
Apart from agonizing over layoffs, exporters are cutting costs, asking buyers to agree to higher prices and looking for new clients in Australia and New Zealand. Economists say the rupee's heady rise is likely to continue because of enthusiasm for the Indian market among foreign investors and fund managers. Exporters have petitioned the government to control dollar inflows, refund their transaction expenses and lower interest rates for export finance. Some have also suggested that the government initiate a dual exchange-rate system, with one rate fixed for the exporters.
The finance minister, P. Chidambaram, has said that the rupee's nine-year high is not in the government's "comfort zone" but that exporters will have to learn to live with the "market-determined" rate.
Surjit Bhalla, who heads Oxus Fund Management, an economic research firm in the capital, New Delhi, said that the Indian government should manipulate the rupee the way that China keeps the yuan undervalued.
"By intervening, the government will keep the Indian rupee competitive. That is what the whole world does," Bhalla said. "Why should India try to be a hero on a white horse and let our currency appreciate? It is a body blow to our economy, and we end up helping China. The government has created a monster, and I hope they fix it soon."
The rupee's rise has brought down inflation and has helped lessen the burden of importing crude oil, but exporters warn against the specter of increasing unemployment.
"A gradual rupee appreciation of 2 to 3 percent over a year is good news. But this sudden and sharp rise spells doom," said Ganesh Kumar Gupta, president of the Indian export federation. "This year, the balance sheets of all export companies are showing red. Millions are losing their jobs, and there is no social security in this country."
Most of the workers that Orient Craft fired earned about $100 a month. Mohammad Afroz, a tailor who was fired two months ago, has five dependents.
"I have sent my wife and three children back to the village. I removed my children from school, and I have not paid rent. I feel ashamed and I cannot tell anybody what I am going through," said Afroz, 31, stroking his unshaven face, as he stopped by Orient Craft recently to check if the company was re-hiring. "They say it has something to do with the rupee and dollar. I have lost my job for reasons I do not even understand."