The Dubai crisis shocked the world for a day and then it was all hunky-dory again. The jolt was possibly because global markets did not expect that things could come to such a pass despite many obvious signs. So even though the amount involved was not earth shattering, a feeling that there could be more than one cockroach in the kitchen hurt sentiment badly. But the rebound was quick as the market regained lost ground in the subsequent trading sessions.
For India though, the Dubai crisis may be a tell-tale sign of things to come on another front – which is forex flows.
| | | | With exports down, remittances from the Middle East most likely to be hit, the rupee could come under pressure | | | | |
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The Persian Gulf accounts for a third of remittances into India, and the Dubai situation could put pressure on remittances at a time when the biggest factor making up for our current account deficit is invisibles. On the capital account, much of the money flow is because of foreign portfolio investments that are chiefly driven by the dollar carry trade. Without doubt, this will fly back in case the markets turn for the worse.
More significantly, the UAE pipped the US last year as India’s largest export destination with a share of 13 per cent of total exports. Since Dubai accounts for roughly a third of UAE’s GDP, it would mean that 3 per cent of India’s exports could be at risk. That may not look too bad, but if you consider the demand situation in the US, you will be forced to rethink your stance.
Exports this year have been continuously falling, the only consolation being the easing pace of the fall. As the external demand situation does not seem set to change dramatically for the better in the coming quarters, the pain for Indian exports could continue. This is more so because we are neither a low-cost nor a high-quality player in most categories. Our enthusiasm to ship out goods comes from export incentives handed out by the government.
Take the case of textiles. Most large companies have been turning the spotlight on to the domestic market as exports have been under pressure. Software services is one sector that can boast of some solid competitive advantage, but then none, including Nasscom, has a rosy growth story to paint out there. Auto ancillary was touted to be next big outsourcing bet, but that sector has not scaled up as anticipated, and before it could, the global auto industry hit speed-breakers. Now it will have to start the ignition process all over again.
Pharmaceutical design, development and contract manufacturing seems to be on a strong footing, chiefly because of the depleting drug pipeline of multinationals. Here at least, we are among the favored low-cost destinations because of our legacy strengths. But the headway gained here cannot compensate enough for the demand contraction on other fronts.
That puts the country in a rather delicate situation as far as the external account goes. And then, there seems to be a fairly strong case for the dollar to rebound. As this piece was being written, the dollar index was inching up even as the US markets were losing ground despite a better-than-expected jobs report. So far this year, there has been an inverse correlation between the dollar and stock markets.
So with exports down, remittances from the Middle East most likely to be hit, the rupee could come under pressure. For now, the government can be smug that capital inflows can more than make up for any shortfall, but who is to say that it will not reverse in the wake of Greece defaulting on its debt repayment timeline.
mahalakshmi AT outlookindia DOT com