Counterintuitive as it may sound, the dramatic fall of the Rupee has created a historic opportunity for Indian micro, small and medium scale manufacturers, according to the Federation of Indian Micro and Small & Medium Enterprises (FISME), India’s largest MSME organisation.
“Most MSMEs whether catering to domestic markets or exporting are not complaining,” said FISME President V.K. Agarwal. “According to FISME’s analysis, the balance of macroeconomic factors indicate that the current level of the rupee will be the new normal in the short to medium term and this represents a historic opportunity for Indian manufacturing,” he added.
Since the 1990s, Indian manufactured goods have been facing intense competition from Chinese goods both in domestic as well as in global markets. Indian manufacturers have often pointed out that the key reasons for the dominance of Chinese products were export subsidy and currency manipulations in China.
Over the last 13 months, however, the Indian currency has depreciated by around 27% against the US dollar while the Chinese currency Renminbi has appreciated continuously - by 40% since 2005 and by 12% since June 2010. At the same time, the currencies of competing economies have depreciated only marginally - Vietnam Dong by 0.4%, Malaysian Ringgit by 4%, Thai Baht by 4% and the Indonesian Ruppiah by 8%.
FISME feels that Indian manufacturers must exploit this currency-generated price advantage to penetrate new geographies such as the ASEAN group of countries, Africa or Latin America. FISME has called upon the Government to liberally support various market penetration initiatives.
The new situation also means that Indian MSMEs are no more apprehensive of taking a beating at the hands of Chinese products if the government now allows FDI in multi-brand retail, Mr Agarwal said.
When the government had announced its decision to allow FDI in multi-brand retail last November, FISME had opposed the move as Indian MSME manufacturers were apprehensive of a surge in imports from China. The scenario has undergone a dramatic change during the last six months: the fall of the Indian currency and simultaneous rise of the Chinese currency has provided an added comfort level for Indian manufacturers, he said.
“Now we don’t mind FDI in retail provided it is done in a phased manner and with the caveat of a 30% procurement set-aside for MSMEs,” the FISME President said.
According to FISME’s analysis, the currency markets have already factored in the burden of large fiscal deficits (of both Central and State governments), high current account deficit and persistent high inflation. As a result, the current level of the Indian Rupee is likely to be the “new normal” which will persist in the near to mid-term. This provides us some time to check out the impact of FDI in retail in the Tier-I cities first and then in other cities and regions in a phased manner, Mr Agarwal said.