Falling Re: India needs to ramp up exports

A flare up in trade war and high fuel prices may batter the rupee even more and, both, the falling rupee and higher crude prices are raising India's import bill and widening the current account deficit (CAD).

The rupee has fallen further and fuel prices have soared. A flare up in trade war and high fuel prices may batter the rupee even more and, both, the falling rupee and higher crude prices are raising India's import bill and widening the current account deficit (CAD).

To make the matter worse, gold imports are seen rising as plunging rupee has forced investors to hedge their risk in the yellow metal. Besides, stock market, whose growth appears to be muted going ahead, has regenerated traders' interest in gold.

Crude and gold import together have a large bearing on CAD, which essentially means a country buys more goods and services than it sells. Thus raising trade imbalance and impacting the rupee.

Adding fuel to the fire is the latest situation of credit crunch in the financial markets as a fall out of Infrastructure Leasing and Financial Services Ltd (IL&FS) crisis. Together these do not bode well for the economy whose quarterly growth may have topped 8% but fresh investments have not taken place for the past 8-9 months, typical in an election year.

On Wednesday, the rupee saw a historic fall and crashed below the 73 mark against the dollar. Traders said a strong demand for dollar by importers weighed on Indian rupee. The other factors were rise in capital outflows and a related fear of rising CAD and fiscal deficit. Fiscal deficit occurs when government’s spending exceeds its revenue.

The government recently imposed restrictions on 19 non-essential imports in order to curb CAD from rising but spared gold, whose import saw a sudden rise in August, according to the latest estimates.

Official sources said the government's hands are tied as a further rise in gold imports may increase smuggling of the yellow metal manifold. Gold already attracts a customs duty of 10%.

There is no alternative to crude and gold imports as India does not produce these two commodities. In this scenario, ramping up exports is the only way to stem the flight of rupee.

The ongoing trade war between US and China present an opportunity for India to capture the Chinese commodity market vacated by US in the wake of higher duties imposed by Beijing. A commerce ministry study has identified at least 100 products where India can replace US exports to China.

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