The rising inflation, which touched a 13-year high of 11.05 per cent for the week ended June 7, could erode competitiveness of Indian goods in key foreign markets, impacting the growth of exports.
Labour intensive traditional sectors like handicrafts, textiles, leather, marine products, agro-processing, toys, sports goods and low-value engineering products, which account for 60 per cent of the Indian export basket, are likely to be the worst hit if the headline inflation rate continues its northward movement. India has set an export target of $200 billion in 2008-09 over the $155 billion seen in 2007-08.
Trade experts suggest that the rising inflation may have a "very strong bearing" on Indian exporters in the near future. "Rising fuel prices, which is one of the major drivers of inflation, have caused an increase in transport costs. This will add to the cost of exporters.
But the recent increase in inflation rate means that exporters will have to increase wages of their workers to compensate for the rising cost of commodities," said K T Chacko, director, Indian Institute of Foreign Trade.
Sudhir Dhingra, chairman and managing director of Gurgaon-based garment exporter Orient Craft Ltd, said: "Workers in the textile sector work on minimum wages and cannot bear the burden of this inflation rate. We will have to do something. But then, increasing wages will erode our price competitiveness."
Wages account for up to 20 to 25 per cent of the cost of a product in the textile sector, which has a share of nearly 11.5 per cent in the Indian export basket. "We may not see an immediate impact because of the current inflation rate. But in the mid-term, Indian exporters will get hit when they increase wages," added Dhingra.
Engineering goods sector, where salaries account for 3 to 6 per cent of the product's cost, is facing a similar situation. The sector accounts for 20.35 per cent of Indian exports.
To make things worse, prices of raw material like steel have risen by 40 to 80 per cent in the last eight months. "Nearly 80 per cent of the cost in engineering goods sector is accounted by steel.
The rising inflation rate will also mean increased manpower costs," said Rakesh Shah, chairman, Engineering Export Promotion Council. "As a result, it is difficult for exporters to commit to their international clients, who have other options to choose from," he said.
Exporters feel that traditional sectors will be the hardest hit. "If the inflation rate continues to rise, Indian exporters will lose their competitiveness, which was recently restored partially due to a marginal depreciation in the rupee against the dollar in the past two months," said Ajay Sahai, director general, Federation of Indian Export Organisations.
"Inflation in most of our competing countries is in the range of 4 to 7 per cent. We will lose competitiveness in the international market, barring sectors like gems and jewellery and petroleum products," added Sahai.