Rupee, where to?

A news item caught my attention recently, which seem to have escaped all the mainstream media. It appears that last quarter, India might have turned into a current account surplus country from a current account deficit country. The biggest reason for Rupee's fall in recent times has been the huge current account deficit, which was threatening to go close to 5% of GDP. From there, moving to current account surplus will be quite a feat, which India seems to have achieved.

To start with, let us look at trade deficit numbers for various months of last quarter.

Sep 2013 - 6.7 billion USD

Aug 2013 - 10.9 billion USD

Jul 2013 - 12.27 billion USD

Total trade deficit for the quarter ~ 30 billion USD

Indian services have always been surplus in the range of 5-6 billion USD on a monthly basis. That gives us approximately 15-18 billion dollars from services export for the quarter. If we reduce this number, we get a deficit of about 12-15 billion USD.

India is the largest recipient of inward remittances. Indians staying abroad sent approx. 70 billion dollars to the home country last year. That gives us a rate of almost 17-18 billion USD quarterly. If we add that number to the deficit of 12-15 billion USD, we get a net positive number. So, looks like India has finally turned into a current account surplus country. The exports have also grown by double digits in percentage terms for all the three months. If this is sustained, the days of Rupee depreciation are over.

Corrigendum: The calculation above does not take into account outward remittances. Outward remittances are almost to the tune of 35-36 billion USD per annum. So, net inward remittances are approx. 36 billion USD p.a. or 3 billion USD p.m.. So, from the services export and net inward remittances, we get an amount of approximately 8.5 billion USD per month. That will give us a quarterly income of around 25 billion USD. That still leaves us with an current account deficit, but with a much smaller number of 5 billion USD. Even if this rate is retained for next 2 quarters, our current account deficit for the year will be less than 40 billion USD, out of which 20 billion will be done in the 1st quarter. and remaining 15-20 coming in the last 3 quarters. 40 billion USD is just 2% of Indian GDP of 2 Trillion, which is a far better number compared to the 5% that we had. And if the same rate continues in the next year, our current account deficit should be less than 20 billion USD or less than 1% of the GDP .

Indian Export Composition

Recently, with rupee depreciating, there was a lot of talk about Indian export competitiveness. This prompted me to look into the Indian export composition. There were some interesting findings that I would like to share.

To start with, Indian exports can be divided into two categories; Merchandise and Services. For Jan-Mar 2013 quarter, they stood at 84 and 37 billion USD respectively. If I annualize these numbers, I get roughly 500 (484 to be precise) billion dollars in exports. That sounded like a lot, until I saw the US and China numbers, which were two trillion USD plus and almost four times that of Indian number. Anyways, this is how the composition of these two broad categories looks.

Further, services export has following composition.

It is interesting to see the Indian software story in full glory here. Software exports are almost half of all the services exports and it stands close to 70 billion dollars annually as of now.

Now, coming back to merchandise (goods) export, we see the following composition.

It is interesting to note that the largest Indian export sector, as far as merchandise is concerned, is petroleum. One would think that India is petroleum deficient and hence there should not be any exports of petroleum products from this country. But, the numbers tell a different story. Actually, many Indian companies purchase crude oil from other countries, refine them and export them. Reliance is one of the biggest players in this field. IOC, BP, HP also has their own refineries and they may also be in this business. It will be interesting to know how much each of these companies export. But, that will be a topic in itself and we will get back to this in a future blog. For now, it is sufficient to point out that petroleum exports out of India is roughly 80 billion dollars and this sector's export are bigger than much fabled software sector. Sad part is that this industry employs very few people compared to millions employed by software, and hence does not have too much impact on the economy. But these exports are a cash cow and the empire of Reliance Industry is built on it.

The second biggest goods export sector is Gems, Jwellery and Pearls. This is a traditional area, where Indians always had the upper hand and very few countries compete with us in this area. But, the problem is that with the falling global growth, the demand for these items drop and hence it can't be scaled heavily.

The third biggest goods export sector is textiles. Here, cheap labor and high productivity (longer number of hours put up at the job) play a major role. China is the leader here (they force people to work 14 hours a day) and India gets competition even from countries like Bangladesh (cheap labor). This sector hardly requires any specialization and hence India can't improve quite a lot here because of democratic society and inherent laziness ( partly because of more respect for the smarter kind of work) . The good part of this sector is high employment for low quality employees, and hence it could improve the poverty levels quite a lot, if employed in rural areas.

From here onwards, the story becomes more interesting as the next five sectors are chemicals, raw Agri products, transport equipment, machinery and base metals. These are new industries, which are not talked about quite a lot in the media, but has been doing better over time. So, let us look at their composition one by one.

Chemicals: Here is the break up of the chemical sector.

Interesting thing to note here is the contribution of pharma sector. India is quickly becoming a generic drug making hub of the world. India has many companies in this field and many more are getting acquired by international pharma giants.

Agri Products: Here is the breakup of Agri sector.

Whenever we thought about Indian Agri exports, we always thought about tea. But the graphic above gives a completely different picture. India's biggest Agri exports are cereals. These could be wheat, rice, corn or similar stuff. For a country, which has world's second largest population to feed and which was dependent upon imports of cereals from other countries around 40 or so years back, this is remarkable.

Transport Equipment:

Notice the 50+% percentage contribution from Road sector. Companies like Maruti and Hundai export almost 15-20K cars monthly from India. There are others like Renault and Ford who are planning to start exporting from India. This is one sector, which is looking hot from export perspective. Among the two wheeler manufacturer, Bajaj has already been a major exporter. With Hero calling off its JV with Honda, it is also opening its doors for exports.

Another interesting industry is shipbuilding industry, which has a lot of opportunity and many companies tried to become large corporations in this area but they did not go very far. Some of the heroes of the pre 2008 era (ABG Shipyard, Bharati Shipyard) have not gone anywhere and still remain small fries. This industry also has large potential as in this arena competition is mostly from Asian counterparts.

Machinery:

The interesting part here is the electric part. China is the King in this area and manufactures almost 80% of the things that world consumes. This portion is also related to chip manufacturing as most of the electric and electronic things nowadays are based on chips. Another thing to be noted is that India imports these items way more than it exports, thus causing a huge net outflow. This field alone represents a huge opportunity, if someone wants to exploit it.

Base Metal:

The graph clearly shows the effects of huge iron ore reserves that India has. It also shows that there is a lot of potential in the Iron and Steel sector in India. Several problems in recent time (Iron ore mining ban and other thing like land acquisition for large projects) have slowed down this sector, but long term potential remains huge.