In the recent past, high inflation, a depreciating Rupee, and surging energy prices – macroeconomic factors that are weighing on global economies, including India’s – all have a direct impact on the Indian import sector.
Following the Russia-Ukraine war, the Indian Rupee has weakened significantly in the last one year. During this current year, the Indian currency also crossed the psychological barrier of 80-mark against the US dollar and there’s been a continuous decline in the value of the Indian currency predominantly due to the Russia–Ukraine fallout – which in turn has an impact on India’s import and export sector.
According to the Ministry of Commerce & Industry, India’s overall exports (Merchandise and Services combined) in June 2022* are estimated to be USD 64.91 Billion, exhibiting a positive growth of 22.95 per cent over the same period last year. The overall exports (Merchandise and Services combined) in the 1st quarter of FY 22-23 (April-June 2022)* are estimated to be USD 189.93 Billion, exhibiting a positive growth of 25.16 per cent over the same period last.
To curb India’s dependence on imports, the Indian government has implemented a slew of measures and policies like the Production Linked Incentive (PLI) scheme for various sectors, including the semiconductor and display manufacturing industry which is currently entirely dependent on imports.
In addition to the implementation of various government schemes, a host of global and domestic news developments and updates – including new regulations and policies affecting various sectors, global cross-border negotiations, impact of geopolitical tensions on account of the Russia-Ukraine war, forex fluctuations, and potential rate hikes by central banks across the world – have a direct impact on the import market.
Here’s a look at some of the top headlines dominating global and domestic markets that could potentially impact the Indian import sector:
Impact of depreciating Rupee*
The Indian Rupee has weakened considerably over the past year, with the currency breaching the psychological 80-mark against the US dollar to hit a historic low earlier in July.
The import sector has been hit hard by this sharp depreciation of the Rupee. From importers of crude oil, commodities, chemicals, and electrical machinery to Indian students studying in foreign universities to even business travellers, everyone has felt the heat of the Rupee’s fall against the dollar.
RBI had also intervened in the currency market to help steady the Rupee slightly after the unit weakened to 80.05 per dollar in early trade on July 19, 2022, a record low for a seventh successive session. Union Finance Minister Nirmala Sitharaman said that global factors such as the Russia-Ukraine war and tightening of financial conditions are all having an impact on the performance of the Rupee.
Outward remittances hit all-time high in FY22
Outward remittances, which is a transfer of foreign funds by a person in India to a beneficiary outside of India, were at an all-time high at $19.61 billion in FY22, up from $12.68 billion a year earlier.
Data from the Reserve Bank of India (RBI) shows that outward remittances stood at $2.03 billion in May 2022, with travel alone accounting for nearly $1 billion while study abroad stood at $264 million.
Resident individuals can rely on reliable banks such as ICICI Bank to make
for a range of purposes under the liberalised remittance scheme (LRS). For domestic individuals as well as importers, ICICI Bank offers convenient and well equipped international wire transferring services that allow them to send money to other countries by simply instructing the bank. Importers also have access to advanced import payment, which allows importers to make advanced payments (prior to the shipment) and ensure timely and accurate processing and remittances.
RBI to allow settlement of international payments in Rupees
In the first half of July 2022, the RBI announced a new mechanism by which international trade payments can now be settled in Rupees. The RBI aims to promote global trade from India and at the same time support the increasing interest of the global trading community in INR.
Indian importers who will be undertaking imports through this mechanism will make payments in Rupees. These payments will then be credited into a special Vostro account of the correspondent bank of the partner country. This new mechanism will help with issues with invoicing, exchange rates and settlements in cross-border trade.
India resumes negotiation with EU on proposed FTA
On June 17, 2022, India and the EU resumed negotiations for the proposed Free Trade Agreement (FTA). Commerce and Industry Minister Piyush Goyal stated that the ongoing negotiations were aimed at creating a fair, balanced, and equitable free trade agreement.
The EU is India’s third-largest trade partner, accounting for 11% of all Indian trade in 2021. India’s merchandise imports from the EU were $51.4 billion in 2021-22. This year, India has entered into FTAs or talks of FTAs with the UAE, Australia, the UK, and Israel.
GST unconstitutional on ocean freights
In May 2022, the Supreme Court stated that GST on ocean freight paid in case of import of goods is unconstitutional. Importers who have paid these taxes are now also eligible for a refund. This ruling is expected to benefit many Indian importers who will no longer have to pay these taxes.
Norms to rationalise and simplify payment settlements
In April 2022, the RBI proposed to modify the existing norms to rationalise and simplify the process for payment settlements from imports and exports through e-commerce. Currently, banks are permitted by the RBI to offer facilities of settlements and the process of export and import related remittances.
This is being done by getting into contract with the Online Payment Gateway Service Providers. As e-commerces becomes more popular, the guidelines need to be updated. The RBI has proposed that this facility will be made available for online imports of digital products and goods that do not exceed $3,000. Whereas in case of exports, the limit has been proposed at $15,000.
Staying updated on important current affairs relating to or impacting the import sector is crucial for importers and individuals looking to make outward remittances.
Understanding the nuances of latest import regulations, tracking foreign exchange rates, understanding the limits on foreign money transfer, and RBI guidelines for remittances, among others, will enable importers to successfully navigate the prevailing market conditions.