CALCUTTA, India, March 26 (UPI) -- Indian industry stands to gain a good chunk of business opportunities in the reconstruction of Iraq and international diplomacy will play a crucial role in this.
H S Mejie, chairman of the Indo-Iraqi Joint Business Committee of the Federation of Indian Chamber of Commerce and Industries, an industry lobby, said that though Indian companies may not be able to participate in direct bidding, they will have a major role to play when it comes to rebuilding of post war Iraq. "Most of the orders would go to designated international companies. They will then allot various areas to ..other companies," he said.
The Indian industry estimates that that Iraq rebuilding expenses could touch $1 billion a week immediately after the war, and that does not include the humanitarian aid and other social development expenses, where India could play a significant role, too.
The country's business community is banking on India's political neutrality in this war and hopes that one of the main reasons for a major portion of Iraq's rebuilding contract to flow India's way would be the fact that many European countries, owing to their opposition to the war, could play a limited role in the reconstruction process.
As many as 300 Indian companies have interests in Iraq and according to sources, as recent as two weeks ago some of them were still operating. "They have relocated their people to neighboring countries like Jordan and are waiting to move in as soon as they can," said a FICCI spokesman.
Mejie also said that most of the ongoing business contracts in which Indian companies are engaged in Iraq, are under the U.N. Security Council's program for humanitarian aid. For this, Indian companies have already been issued letters of credit, by the United Nations. He said that although there is a fear this program has been cancelled, "it cannot be true because these LoCs are irrevocable, and form a totally legalized program under the U.N. Security Council's 661 Committee."
FICCI expects that these contracts alone could fetch $500 million in 12 months right after the end of the war.
But even as that could spell good news for the Indian economy, a section of the Indian industry like the exporters, particularly the software companies, and a few importers have an unusual concern: they aren't worried about the typical fallouts of a war -- higher costs, oil prices, recession, inflation, etc. They were worried that the war could further weaken the sputtering U.S. economy, which in turn would add to the weakening dollar against the Indian rupee.
For more than a year now -- but more markedly beginning May last year -- the rupee has been firming up on the dollar, sending Indian businesses scurrying to foreign-exchange analysts for an outlook every time a U.S. offensive on Iraq seemed imminent. And "Operation Iraqi Freedom" is making the dollar look much more vulnerable against the rupee than ever before in the last decade.
The Indian industry has for long been used to a depreciating rupee- since 1990, the Indian currency has depreciated an average 4 percent to 5 percent against the dollar every year -- and the sudden reversal in its fortunes means a paradigm shift of strategies for Indian businesses for managing their foreign exchange transactions.
According to experts, a strong rupee although looks good from the economy's perspective, has implications that could often lead to negative impacts. For instance, to exporters, the gaining rupee makes their products not only much less competitive vis-à-vis competing exporters from other countries, it also means that they end up earning fewer rupees for every dollar of exports.
The recent strength of the rupee is no flash in the pan, however. After bottoming at 49.06 rupees vs. the dollar last May 16, the rupee has steadily been inching up. By Jan. 1, it had climbed to 48.03 to the dollar and a day before the war, it reached its highest. If one were to see it in percentage terms, the rupee has gained 3 percent between May 2002 and March 2003. Analysts said, for the first time since the forex market was deregulated beginning 1990, the rupee ended any calendar year (2002) with net appreciation.
But besides the war, India's exporting and importing communities are worried about yet another significant development that is adding to the strength of the rupee. Also for the first time since 1990 India's current account -- the value difference between what India exports and imports -- registered a surplus. This is important because most of surplus was due to a marked rise of India's exports to the United States. India has become the 19th-largest exporter to the United States, up from 22nd a year earlier, logging a trade surplus of $10.6 billion in India's favor in 2002.
And that's not only because of software exports. Although India's software services exports to the United States went up by nearly 20 percent to $5.7 billion in calendar 2002, the rise was higher -- by 24 percent -- in merchandise exports. These moved from $9.7 billion to $12 billion, while total U.S. exports to India stagnated at around $7 billion during that year.
However, A.V. Rajwade, a forex consultant, offers a contrary view. According to him if one were to look at the real effective exchange rate index for the rupee, it has depreciated (by about 3 percent) in the last year. How? Because the other three global currencies -- euro, pound and yen -- have gained much more against the dollar than the rupee has.
Still, there are experts who believe that the rupee's gains are not only due, but also long due. "Even at present rates, the rupee is undervalued by some 25 percent versus the dollar, on price parity," said Mark Mobius, president, Templeton Emerging Markets Fund, who has been predicting a rupee correction for the last two years.
