Indian Rupee has already touched an all-time low. This weak rupee can help our food exporters for the time being if these exporters are not importing anything to re-export. Those who are importing to serve the domestic market are now at a disadvantage. However, in the real term, our food and agriculture industry is unlikely to benefit, opines Rajat K Baisya.
Indian Rupee has already touched the all-time low at Rs 76 to one USD. Since 9th of August Indian Rupee depreciated 2.1% when other major Asian countries reported only 0.7% depreciation in their currency. Global trade policies much dictated by the US have been pushing many currencies in the region to a gradual slide. The US increased tariff rate by 25% on steel and aluminium from China and in retaliation, China also increased 25% tariff on 3 billion USD food import into China from the US. And that fight is still going on. RBI trying to face the situation by selling dollars but that may not provide stability to our economy when the Indian import bill is much higher than our export and every month the balance of trade is increasing. Selling dollar in the market can also lead to cash shortage triggering other problems like escalating the borrowing costs. Last two years consecutively we have import bill much higher than our total export earnings. On an annualised basis this year our import bill will exceed our export by about USD 170-180 billion which was USD 160 billion during 2017-18.
However, this weak rupee can help our exporter for the time being if these exporters are not importing anything to re-export. Those who are importing to serve the domestic market are now at a disadvantage. And in that list, there are many categories of the products. Let us examine some of these industries in the following sections.
As mentioned earlier, those who are in international trade will have an advantage. Agricultural commodities in grocery, tea, and spices that have a significant export market will benefit from this short-term weak local currency. In that list products like marine products, organic foods and other traditional ethnic foods like the pickle, papad, Indian snacks like bhujia etc. will also benefit provided they are able to hold on the price at the same level as before the depreciation has hit the market. The importers are also very clever. And they can adjust the price again taking the current exchange rate into consideration. I have seen in marine products trade that the agents of the importers from Japan and US will everyday adjust the price to be offered based on the everyday price of the local catch. Agents are holding master Letter of Credit which is utilised to place official confirm order on the processors adjusting the price which deprives the local processors to exploit the opportunity of a lower price when there is large catchment at the port city. For many processors of other commodities, this might happen. I have been talking to a Hyderabad based exporter of organic spices and they are the dedicated supplier to middle east based organised large retailers and I was told that they are required to re-negotiate the prices and when enquired why I was told that the reason is new exchange rate fluctuation. The traders around the world have a similar mentality, they would like to make short-term gain taking this kind of opportunity. Our exporters do not have that strength to bargain hard and they will be willingly passing on the benefit instead of pocketing it. Hence, although there is an opportunity it is doubtful how many will be able to convert that opportunity to their advantage. There will not be many.
Now let us take the second group who are importing to sell in the domestic market. Their numbers also will be many. Alcoholic beverages including liquor and beer as well as health foods, high protein foods, specialty foods, dairy products etc. are imported into India and they have a very large market. Only a few years ago we have not seen so many brands of beer including craft beer in the market but now, you name it and they will be there. These products are now going to be costly. The customers for these imported products will be from the high-income group bracket and hence even if these are costing higher, people will still buy it. But the impact of price increase will be felt in lowering the demand. The basic increase in the price of the imported stuff will also have their cascading effect in the sense that all other costs including customs duties and trade margins will be increased proportionately and everything cannot be passed on to the consumers by raising the prices. This sector also thus going to be impacted by falling rupee against the dollar.
Then there is another category where the government also has increased customs duty in retaliation to the decision of the US government and those products will now be going to be costlier. US almond and apple have flooded the market but their price is now going to go up leading to the reduction of consumption. These days we get varieties of fruits and vegetables which are actually imported into the country through the trading route under globalisation and open market policy. These products are likely to cost more. Of course, to retain the market, some of the importers in India will persuade their principal abroad to adjust the price to absorb part of the shock of the local currency depreciation. But in any case, the impact will be felt and profit margins will get squeezed. India imports a huge quantity of almond from US (about 100K MT valued at Rs 4500 crores) and apples 93K MT valued at Rs 670 crores and Walnut 22K MT valued at Rs 420 crores. These will be costlier now. Although with the US, we export more of agricultural products than we import but that gap will now narrow down further.
There are numerous processors in India who are actually thriving by exporting semi-processed food to international buyers. Some of those are even only seasonal players like mango pulp producers. What will happen to them? Because the processors abroad will be dependent on them for their pulp, juices, and puree, etc. their market will not vanish but the price recovery will get adjusted leading to lower profit.
Then there are many companies that deal with food ingredients and some of them are only importing and selling here in the domestic market. Some of them are importing in bulk and repacking and then selling in the domestic market. Those who are producing it here also dependent on some import of key ingredients. They all will also have a disadvantage.
The government has signed the FTA (Free Trade Agreement) with many friendly countries in south-east Asia such as Vietnam, Cambodia etc. Their local currency has not depreciated that much and they, therefore, will have an advantage over the local producers in India to compete. Our local traders are, therefore, will be in a disadvantageous position here also.
Project cost which will be dependent on imported machinery, packaging material for the certain category of processed foods which are imported will also increase. In the ultimate analysis, there is going to be a more negative impact on the industry because of the depreciation of the rupee. The government is not showing any concern or anxiety for that saying that it is due to global factors. But no one can wish it away under any circumstances, and if it continues escalated costs will slow down the growth.
In real term, our food and agriculture industry is unlikely to benefit from our currency weakening. Although there could be a possibility of short-term gain in some sectors if they have bargaining power. But here also when rupee becomes strong again in future, the importer might insist on holding on the earlier price. Either way, our processors stand to lose more than gain.