The auto industry and the falling rupee By MadanSabnavis

A sharp depreciation of the rupee, as has been witnessed in the last couple of months, should typically lend support to exportables which become cheaper in dollar terms in international markets. At the same time, imports become more expensive which either leads to lower demand or substitution of the same for an Indian product at a lower cost in case it is possible. In the absence of exercising these options, the cost goes up. The automobile industry, which has a stake in both exports and imports, will be affected in a disparate manner on account of the rupee depreciation.

On the imports side, there are two effects that may be considered. The inputs that are imported in the form of iron and steel, metal products, electrical fittings plastics or wires, among other parts, would cost more on this score which will put an upward pressure on cost of manufacture. This will hold more for high-end vehicles where substitution through domestic parts may not be possible given the ‘snob’ value attached. At the lower end of vehicles where substitution is possible, manufacturers will try and hold back costs through substitution so that they could push sales in a market where there is stagnancy due to low demand conditions. But, typically there would be a tendency for costs to increase which will be reflected in higher prices of automobiles. Companies may wait for longer to see in case this trend of depreciation is maintained and in the meantime look for ways of hedging such forex exposures, as increasing prices of the vehicles at a time when economic conditions have not quite picked up will impact demand.



The second effect would be on import of automobiles, which falls under the category of ‘transport equipment’ as per RBI data. Here the trend last year is that there was virtually no change in the import of transport equipment even though the rupee had fallen by over 13 percent on an average basis in FY13. Quite clearly, the vehicles are either not replaceable within the country or are in the luxury segment where cost does not matter. This rigidity is significant as it has been seen in other products too which has kept our policy makers busy working out modalities to control such imports.

On the exports side, India does have a presence in international markets and hence should theoretically gain from this price advantage. However, last year, notwithstanding such depreciation the value of exports of ‘transport equipment’ had declined from $ 21.4 billion to $ 18.4 billion. Here it was the low demand conditions in international markets which impacted this segment. We need to see global economic conditions improve significantly for demand to improve and our exports move up.

Therefore, given these twin effects, the industry will have to take a call on pricing at a time when it matters as it could ultimately be the factor that swings things around. The sense here could be that until conditions improve the gains on the exports side, to the extent that they accrue, could be used to tide over the higher input costs, to maintain the status quo.

(The views expressed by the author are personal)

MadanSabnavis is Chief Economist, CARE Ratings