U.S. efforts to increase trade relation with India through exports are in troubled waters because of the soaring value of dollar. As cheap Indian goods flood U.S. markets, trade deficit increases.
Robust dollar and an expanding economy is strengthening the value of U.S. dollar and giving more power to U.S. consumers. But a strong U.S. dollar is a concern for country’s exporters, as it makes their products more expensive in foreign markets.
“When the value of dollar goes up foreign countries [like India] tend to buy less”, said Guy Lebas, managing director & chief fixed income strategist of Janney Montgomery Scott LLC. “They find U.S. goods costly and that increases the trade deficit or the trade balance is weakened”.
U.S. stands among the top ten exporters to India along with Germany, which is one of the top ten exporters to India, and shares 3.04 percent of the total export value.
“Strong dollar makes U.S. goods relatively costly while competing against European countries like Germany,” said Scott J Brown, senior vice president, chief economist, Raymond James. “The value of rupee has been falling since four years and is an incentive for consumers to buy goods made in India”.
Though U.S. dollar is strengthening currencies like rupee and Euro has weakened against dollar. Dollar has risen to his 12-year peak against euro recently, euro has been declining for a while now and reached its greatest decline in March. The quantitative easing (QE) program’s announcement in January 2015 by the European Central Bank further drove down the value of euro. Economists predict that the value of euro will be at par with dollar by the end of this year.
The depreciated value of Euro has a great impact on economy; it will boost its growth. Germany, which stood toward the bottom of the top ten exporters to India, stands a good chance now of going up a few ranks owing to the weakening euro and strong dollar parity.
India is one of the largest importers of oil from U.S. and since oil is priced in U.S. dollars when the value of dollar goes up it is negative for India. But since oil prices are down, it is good for India to buy oil while not losing a large sum of money owing to strong dollar value.
This is a list of the top 10 trade partners of India. These countries imported the most Indian shipments by dollar value. Also, each countries’ percentage share of total exports from India in 2014 is given.
President Obama’s second visit to India in January 2015 while in office highlights his interest to strengthen the economic ties between the two countries. Trade between the two countries has risen by 60 percent to nearly $100 billion since President Obama took office. The president announced certain steps to generate around $4 million in trade and investments with India that will also help to support jobs in both the countries.
President Obama emphasized to strengthen the trade relation with the ‘Export-Import Bank’ committing nearly $1 billion to finance and support “Made-In-America” exports to India. The Overseas Private Investment Corporation or OPIC will aim to support small and medium businesses across India that will produce approximately $1 billion in loans to the underserved markets in rural and urban areas of India. The U.S. Trade and Development will aim to invest $2 billion in renewable energy sources in India.
In January 2015, U.S. exported $1,544 million worth of goods to India while it imported $3,633 million worth of goods from India leading to a trade deficit of $2,089 million. These figures are on a nominal basis and are not seasonally adjusted. In 2013 there was a total trade deficit of $20, 003 million while in 2014 it was $23,600 million and with dollar strengthening the gap between export to and import from India will only widen.
U.S. economy is growing and is expected to grow at its fastest rate in a decade in 2015. U.S. economy’s expansion from July to September at an annual rate of 5 percent was the swiftest for any quarter since 2003. It is also predicted that it would be the first year of three percent growth since 2005.
In today’s expanding U.S. economy dollar is strengthened when market predicts a rate hike by the Federal Reserve. It is so, because people try to change other currencies into dollars to make maximum money through investments in dollar.
With the value of dollar rising against rupee and trade deficit increasing, it will soon become an emerging risk for U.S. as less export will lead to less production and therefore fewer jobs. Though U.S. economy has come out of the great recession and is on expansion mode, a strong dollar can have some negative effects.
The strong dollar can affect the export of major durable goods orders like civilian aircrafts and American-made turbines and other machineries that help to upgrade India’s infrastructure, to India. If India finds it economical to buy from European nations or countries other than U.S. the trade deficit will widen.
The Federal Reserve has become less aggressive about the rate hike to slow U.S. economy and is keeping an eye on strengthening dollar and weakening rupee and euro value to come up with the best time to increase the rate.