Falling dollar: Beginning of end for Indian IT sector and major exporting economies

Since 2002, the U.S. currency has fallen 40 percent against the Canadian dollar, 33 percent against the euro, weakened 24 percent compared with the British pound and 15% compared with the Japanese yen. There are various reasons for this sudden fall in U.S. dollar. U.S.A. has a very large current account deficit, about 5.9% of GDP and very low interest rates, as low as 1.5%. Hence there is little motivation for the other countries to buy U.S. securities at such a low rate. Due to low interest rates, the American citizens have a low savings to income ratio. As spending increases, so do the imports.

However if the dollar continues to weaken at an alarming rate, then it may have a direct impact on U.S. imports. Its imports will fall resulting in reliance on manufacturing industries in the States itself. Until earlier, manufacturing and exports caused work to shift to low-cost destinations such as China, Korea and India. No wonder, China doesn’t want to revalue its currency.

As for India, its IT sector exports are worth about Rs. 70,000 crore. A large workforce depends on this sector. If the U.S. cuts it’s spending on the sector, it could have far reaching unpleasant consequences on the Indian IT sector. This could lead to reduced salary and workforce, which would in turn lead to reduced disposable income from the Indian working class across major exporting sectors such as IT, textile, jewellery and automotive parts.

Also, there are various sectors, which directly drive the revenue of the IT sector. These are banking, retail and insurance. Due to reduced per capita income in the U.S. worsened by the housing sector slump, these sectors may slow down and cause trouble to the Indian IT sector.