The reasons are evident in Coimbatore, a southern city long known as a capital of India’s textile industry, an old-line export trade. Recently, demolition crews razed an abandoned textile mill to make way for the Alliance Mall.
From the ashes of an export industry rises a temple to foreign investment and local consumption. And it is all in keeping with India’s approach to a rising currency. The Indian rupee is soaring — up 9 per cent against the dollar in the last 16 months. That has taken a toll on exports like textiles by making them more expensive on the world market. And the strong rupee poses longer-term threats of overheating the economy.
But instead of fighting currency appreciation, India has been willing to let the rupee rise — for now, at least, and is simply too hungry for foreign capital that is drawn to the strong rupee and is driving it higher, because that influx of money is helping support its approach to developing a modern consumer economy.
The Alliance project, with more than a million square feet of retail space, a hotel, offices and condominiums, is being built by an Indian developer with financing from a British retail company and a South African investment firm. Meanwhile, the foreign carmakers, Volkswagen and Nissan, have started their first dealerships, hoping to capitalise on the growing consumer class in this city of about 1.5 million people.
The clear losers of India’s currency approach right now are garment makers. From April to August, exports were down 6.4 per cent from a year earlier in the $10 billion Indian clothing industry. Although it represents only about 1 per cent of the nation’s economy, the garment industry happens to be one of India’s largest employers.
“All the other countries are protecting their currencies, so why are we not?” said the country’s Apparel Export Promotion Council chirman Premal Udani. Indian policy makers are eager enough for foreign investment that, for now at least, they are willing to endure the damage a stronger rupee inflicts on exports, especially for lower-value goods like clothes. Exports of other Indian goods and services, like software and pharmaceuticals, have not been as hard hit because they are not as price-sensitive. India also places a premium on the higher-value jobs that are fueled by foreign investment.
Not far from where that old textile mill once stood, the German engineering company, Bosch and the American software concern, Perot Systems have opened offices in a new technology park. The influx of capital has helped fuel a nearly 9 per cent annual growth rate for India’s economy. It has also powered the Indian stock market to near record highs. A big beneficiary of the stock rally has been the government, which is selling shares in state-owned firms like Coal India, the world’s largest coal miner.
The government, which has a large budget deficit, plans to raise $9 billion in the current fiscal year from share sales and spend the money on jobs for the rural poor and other welfare programs. A stronger rupee also reduces India’s bill for commodities, like oil, that it needs to import.
“If India is to sustain 8 per cent growth or 9 per cent growth, the only constraint on that can be capital,” said managing director of Prozone, Nikhil Chaturvedi, whose company is is building the Alliance Mall development. Chaturvedi, whose joint venture partner in the Alliance Mall is the London-based Capital Shopping Centers, said an appreciating rupee must be tolerated as an unpleasant side effect of the flow of foreign capital.
India’s willingness to let a rising currency stimulate its consumer economy is what many experts say that another emerging giant, China, should be doing — not only for the good of China’s people but to ease global trade and currency tensions. And yet, while that part of the model might be worth Beijing’s emulating, India in turn can only envy the strength of China’s export juggernaut.
China, which has been wary of letting its currency rise too much relative to the dollar, has one of the world’s largest surpluses in its current account — the broadest measure of a country’s trade and capital flows. India, meanwhile, has the fourth-biggest current-account deficit among the G-20 nations, amounting to 3.1 per cent of its gross domestic product. That places India just behind the United States, which has the third-highest deficit, on a side of the trade ledger no vibrant economy aspires to be.
Over the long term, India needs to pare that deficit and reduce its reliance on foreign capital, which can be fickle. During the recent financial crisis, for instance, foreign investors pulled back sharply from India and other emerging markets, helping to temporarily put the brakes on the economy here.
About 34 miles east of Coimbatore, in the city of Tiruppur, clothing factory owners and workers say the strong rupee is causing them to lose orders to competitors in China, Bangladesh among others that peg their currency to the United States dollar and thus offer much lower-priced clothes to western buyers.
A Tiruppur-based textile printing factory owner, M Sivasubramaniam employs about 70 people — one-third fewer than a year ago. One recent morning, workers trickled into the factory after tea. Their job was to print varieties of T-shirts, including one with an image of the cartoon character Bart Simpson kicking a soccer ball.
Print machine operator S Anand said work was so slow that he was making only about Rs 5,000 ($113) a month, down from Rs 7,000 a year ago when he had the opportunity to work more overtime shifts. But Anand, who supports a wife and two children, is still better off than many of his co-workers who have lost their jobs.
The industry is trying to compensate by focusing on the domestic market and producing more fashionable clothes that command higher prices. But Udani of the export council said neither effort would quickly offset the decline in exports of mass-market clothes.
Whatever the Indian government’s strategic motives for letting the rupee rise, it also knows the risks of trying to intervene.
In 2007, for instance, the country’s central bank tried to stem the currency’s rise by buying dollars and selling rupees. The bank tried to soak up the rupees by issuing bonds. But economists say that the tactic was not entirely successful and that its currency intervention helped stoke domestic inflation.
Prices are a big concern again — wholesale inflation was nearly 9 per cent in September — and policy makers are reluctant to do anything to make it worse, economists say. Still, there may be limits to how long the government would stand by if a lot more foreign capital floods into the country and the rupee rises significantly higher.
Recently, RBI Governor D Subbarao said that the bank would intervene in currency markets if capital flows became “lumpy and volatile or if they disrupt the macroeconomic situation.”
Officials could try to balance the need for capital and the concerns of exporters by regulating the flow of money, said Mumbai-based Infrastructure Development Finance Company chief executive Rajiv B Lall.
They could force investors to commit investments to longer-term projects, by making it harder to invest in stock and real estate markets, which tend to attract “hot money” that flows in and out countries quickly as sentiments change. That would also slow the rise of the rupee, giving exporters time to adapt to a stronger rupee, Lall said.