Yuan devaluation: Time to act

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Bikky Khosla | 18 Aug, 2015
Exports fell for the eighth straight month by 10.3 percent in July to USD 23.13 billion, pushing the trade deficit to USD 12.81 billion. Sectors that suffered the brunt of this trade decline include petroleum products, leather and leather goods, marine products and chemicals. Contraction in overseas shipment for the first four months of the current fiscal stood at 15.04 percent. Over the months, global slowdown played a key role in pulling our exports down and concerns are now even deeper with China devaluing its currency by nearly 6 percent last week.

How yuan devaluation could affect our foreign trade? First, our exports - which are already under pressure with overseas shipments declining month after month - may suffer further as the weaker yuan is likely to make Chinese exports more competitive in the world markets. China is trying desperately to mop up its exports and this is going to make competition stiffer, particularly in sectors like machinery, auto-ancillary parts, and steel. In addition, with the yuan losing it value, Chinese consumers are more likely to turn toward locally made brands. This could affect India's exports to China which comprises mainly cotton, copper and chemicals. Second, if the yuan continues to lose its value faster than the rupee does, China may further dump goods into the Indian market.

Meanwhile, the Centre has assured the manufacturing community that it will take "every possible measure" to stop dumping of goods in order to safeguard the manufacturing interest. At the same time, I think the RBI must come forward with an action plan to withstand the pressure from China and save the rupee - which hit a fresh two-year low against the US dollar in trade on Monday - from further decline. In addition, the central bank should make no hesitance in cutting interest rates in the upcoming policy meet on September 29 or before that on the background of fall in annual wholesale inflation for July to a historic low of (-)4.05 percent. I think monetary easing is indispensable at this juncture.

There is a silver lining, however, amid woes. The rate of export decline is comparatively lower in July and this trend, along with rise in container traffic in first fortnight of August, renewal of GSP benefit for Indian exporters by the US, rise in manufacturing growth in June from 2.9 percent in 2014 to 4.6 percent and improved export performance by sectors like gems and jewellery, pharmaceutical, apparel, plastics and engineering brings some hope, but such respite will prove temporary unless adequate support is provided by the Centre during this difficult time.

I invite your opinions. Which industry do you belong to and what challenges are you facing?