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Causes for Weakening Rupee

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September 10, 2018

What is the issue?

  • The rupee is on a continuing weakening trend against the dollar in the recent days.
  • A closer look reveals that apart from crude imports, several other imports are playing a significant role in this regard.

What is the recent development?

  • The global crude prices are on an increasing trend.
  • Resultantly, the value of petroleum and crude imports jumped almost 25% from 2017 to 2018.
  • It thereby led to an increase in the CAD from 0.6% of the GDP to 1.9%.
  • It is estimated that the CAD may rise to levels of around 2.8%-3% of the GDP in FY19.
  • This is in turn leading to a pressure on the rupee.
  • Notably, this happens alongside a slower growth rate of exports.
  • But besides, several other items imported by India are also playing a crucial role.

What is the changing imports trend?

  • The import basket shows that crude might not be the only one disturbing the equilibrium.
  • Coal - The value of imports of coal and coke jumped nearly 45% from 2016-17 to 2017-18.
  • This rise is in line with the decline in growth rates of coal production in India.
  • Notably, the growth in raw coal production of Coal India Ltd (CIL) has slid over the last three years.
  • It has failed to keep pace with surging demand on account of higher electricity generation.
  • Resultantly, utilities are facing coal shortage at some plants.
  • Bottlenecks in transporting coal from pitheads to power stations have worsened the situation.
  • Besides, demand for coking coal arises from its use in steel-making.
  • But there is a limited supply of high-quality coking coal (low-ash-coal) in the country.
  • Hence there is no option but to import coking coal, and coal imports are only likely to be much higher this fiscal.
  • Others - The value of imports of metaliferous ore and minerals rose nearly 47% in the same period.
  • Another major component has been pearls, precious and semi-precious stones, whose imports climbed 44%.
  • In all, the imports of coal and coke, metal and mineral, non-ferrous metal, and iron and steel rose nearly 73% of the jump in petroleum and crude imports.
  • Even gold imports, which had declined earlier, increased in the FY18.
  • Electronic imports, the second biggest component of India’s import basket also increased around 23%.
  • It is to be noted that this is driven purely by demand and is irrespective of crude price rise.
  • Among the top import items, electronic goods are the only import component that has seen a year-on-year growth (in value terms) over the last three years.
  • It is thus felt that electronic imports are a major area of concern as far as the CAD is concerned.

How is the exports side?

  • While imports have been rising steadily, export growth has slowed down drastically.
  • The total imports in FY18 amounted to around $460 billion, but the exports stood at around $300 billion.
  • India’s imports rose 21% in FY18 over those in the previous year; however, the exports grew by only 9.98%.
  • The trade deficit has thus been widening over the years because of a skewed rate of growth.
  • The average annual export growth was just 0.6% between 2014 and 2018.
  • But the overall trade growth rate had been 25.4%, indicating the less contribution of exports.
  • Given this, the slack in exports could be the silent, unseen reason resulting in the rupee depreciation.

 

Source: Indian Express

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