Reviving the economy
Source: by Jayshree Sengupta: The Tribune
Recently the shrinking of the trade deficit to $6.7 billion in September from $10.9 billion in August 2013, has cheered the UPA government, which can now claim that its policy of curbing gold imports has been successful. The lowering of trade deficit means that there is hope of lowering the current account deficit in 2013-14 to around $55 billion. The widening of the current account deficit has been one of the reasons why India has got a poor rating by the international investment rating agencies.
Now the current account deficit (CAD) could be under control though one month’s trade data is not a sure sign of a long-term solution to the problem. If the trend of lowering of trade deficit continues, it would mean more FIIs and FDI will flow into the country which will ease the pressure on the rupee.
The rupee has depreciated by 16 per cent in the last few months and the widening of the CAD is one of the causes. A high trade deficit is usually unsustainable in the long run because it has to be paid for by exports (which are low) and forex reserves. On the other hand, a small trade deficit is a healthy sign of industrial activity because it shows that industry is importing capital goods that would improve the quality of production, especially exports.
If imports of important spare parts, components, capital goods and project-related goods decline, it signifies a low level of economic activity and lowering of India’s competitiveness. Imports have gone down by 18.1 per cent in September and between April and August 2013, and machinery imports as well as project goods imports fell by 12 per cent and 38 per cent, respectively.
Thus a deeper problem of an on-going downturn is surfacing and it is taking time to go away. The slow industrial growth is a warning and the slackening growth rate of the automobile sector is another indicator.
It was the automobile sector which was the driving force behind high manufacturing growth. Now for about a year, the automobile sector has been experiencing a stagnant growth rate. Associated with the growth of the automobile sector is the auto-component sector which is also experiencing a slow-down. It has led to a very low industrial growth of 0.6 per cent in August 2013.
Basically such low industrial growth is an ominous trend and it could be due to slow rate of investment and slack consumer demand which has been due to high inflation. The inflation rate as reflected by the WPI was 8.01 per cent in August. But food inflation was at 18.18 per cent and CPI too was high at 9.5 per cent. Since essential items like food grains, milk, edible oil and fuel prices have been experiencing continuous price hike, people have less money to spend on expensive goods. They are postponing buying big ticket items like consumer durables (TV, refrigerators, washing machines etc.) and consumer durables’ growth contracted by 7.6 per cent in August. Gold and silver being non- essential items, most people are now postponing purchases. Demand for oil has also been less in August.
People in India and abroad are now watching for signs of economic recovery. Officially, India is not in recession because only if there is a contraction of GDP consecutively for three quarters, a country is supposed to be in recession. But India is definitely undergoing a slowdown since GDP growth sank to 4.7 per cent in the last (third) quarter.
Many predictions have been made about the GDP growth on which economic recovery would depend. The IMF has reduced its forecast for India’s GDP growth recently to 4.25 per cent in next one year. Unless manufacturing growth picks up there cannot be recovery. Manufacturing growth contracted by 0.1 per cent in August. Industrial growth in July was however positive at 2.6 per cent. Around 11 out of 22 industry groups in manufacturing sector showed positive growth during July 2013 as compared to corresponding month the previous year.
There is a global element too in the reduced demand facing manufacturers which is the continuing economic crisis in the EU which has dampened the demand for Indian exports. Most of India’s merchandise exports have been adversely affected by the economic slowdown in EU and recently even the service sector exports have been affected. Service sector growth is important for boosting GDP growth.
Yet it is heartening to note that export growth is up and is in double digit (12.9 per cent). Imports would also pick up when recovery takes place because manufacturers would require more raw materials, capital goods and spare parts for production for domestic and export market.
Agricultural growth is also important for the recovery of the manufacturing sector which is dependent on rural demand. Agricultural growth has been sluggish at 1.9 per cent. There is however a bumper crop this year and agricultural growth is slated to be over 5 per cent. How the supplies are managed will be important for controlling food inflation.
Reviving the manufacturing sector would require lower interest rates. Unfortunately many of the recent decisions regarding interest rates, vital for lowering the financial costs of companies have not been conducive to promoting a higher rate of industrial investment and growth. The RBI has actually raised the repo rate in its last policy review on September 20th by 250 basis points, to 7.5 per cent and this will affect investors’ sentiments. As has been the experience in the past of many countries, tinkering with the interest rate cannot offer an effective antidote to inflation. There has to be supply - side measures also which will effectively increase the supply of those goods (especially food items) for which there is excess demand.
It is also the infrastructure and the high transaction costs that need to be improved to boost exports further. There will have to be easier clearances for trade between neighbouring countries and more jobs could be created on both sides which will lead to greater traction in the demand for goods and services from new wage earners. Fortunately, agricultural demand is likely to go up.
Thus we need to be cautious about favourable signs like a reduction of the trade deficit. Because though it is going to reduce one of the disturbing parameters that are slowing down growth, it could also be indicative of slack industrial activity.
Reviving the economy should be the first priority of the government now. There is need for a more proactive role of the government in trade facilitation and investment promotion. But with general elections so close at hand, will that be possible? Besides, gold imports have to remain low for trade deficit to decline further.
Source: by Jayshree Sengupta: The Tribune
Recently the shrinking of the trade deficit to $6.7 billion in September from $10.9 billion in August 2013, has cheered the UPA government, which can now claim that its policy of curbing gold imports has been successful. The lowering of trade deficit means that there is hope of lowering the current account deficit in 2013-14 to around $55 billion. The widening of the current account deficit has been one of the reasons why India has got a poor rating by the international investment rating agencies.
Now the current account deficit (CAD) could be under control though one month’s trade data is not a sure sign of a long-term solution to the problem. If the trend of lowering of trade deficit continues, it would mean more FIIs and FDI will flow into the country which will ease the pressure on the rupee.
The rupee has depreciated by 16 per cent in the last few months and the widening of the CAD is one of the causes. A high trade deficit is usually unsustainable in the long run because it has to be paid for by exports (which are low) and forex reserves. On the other hand, a small trade deficit is a healthy sign of industrial activity because it shows that industry is importing capital goods that would improve the quality of production, especially exports.
If imports of important spare parts, components, capital goods and project-related goods decline, it signifies a low level of economic activity and lowering of India’s competitiveness. Imports have gone down by 18.1 per cent in September and between April and August 2013, and machinery imports as well as project goods imports fell by 12 per cent and 38 per cent, respectively.
Thus a deeper problem of an on-going downturn is surfacing and it is taking time to go away. The slow industrial growth is a warning and the slackening growth rate of the automobile sector is another indicator.
It was the automobile sector which was the driving force behind high manufacturing growth. Now for about a year, the automobile sector has been experiencing a stagnant growth rate. Associated with the growth of the automobile sector is the auto-component sector which is also experiencing a slow-down. It has led to a very low industrial growth of 0.6 per cent in August 2013.
Basically such low industrial growth is an ominous trend and it could be due to slow rate of investment and slack consumer demand which has been due to high inflation. The inflation rate as reflected by the WPI was 8.01 per cent in August. But food inflation was at 18.18 per cent and CPI too was high at 9.5 per cent. Since essential items like food grains, milk, edible oil and fuel prices have been experiencing continuous price hike, people have less money to spend on expensive goods. They are postponing buying big ticket items like consumer durables (TV, refrigerators, washing machines etc.) and consumer durables’ growth contracted by 7.6 per cent in August. Gold and silver being non- essential items, most people are now postponing purchases. Demand for oil has also been less in August.
People in India and abroad are now watching for signs of economic recovery. Officially, India is not in recession because only if there is a contraction of GDP consecutively for three quarters, a country is supposed to be in recession. But India is definitely undergoing a slowdown since GDP growth sank to 4.7 per cent in the last (third) quarter.
Many predictions have been made about the GDP growth on which economic recovery would depend. The IMF has reduced its forecast for India’s GDP growth recently to 4.25 per cent in next one year. Unless manufacturing growth picks up there cannot be recovery. Manufacturing growth contracted by 0.1 per cent in August. Industrial growth in July was however positive at 2.6 per cent. Around 11 out of 22 industry groups in manufacturing sector showed positive growth during July 2013 as compared to corresponding month the previous year.
There is a global element too in the reduced demand facing manufacturers which is the continuing economic crisis in the EU which has dampened the demand for Indian exports. Most of India’s merchandise exports have been adversely affected by the economic slowdown in EU and recently even the service sector exports have been affected. Service sector growth is important for boosting GDP growth.
Yet it is heartening to note that export growth is up and is in double digit (12.9 per cent). Imports would also pick up when recovery takes place because manufacturers would require more raw materials, capital goods and spare parts for production for domestic and export market.
Agricultural growth is also important for the recovery of the manufacturing sector which is dependent on rural demand. Agricultural growth has been sluggish at 1.9 per cent. There is however a bumper crop this year and agricultural growth is slated to be over 5 per cent. How the supplies are managed will be important for controlling food inflation.
Reviving the manufacturing sector would require lower interest rates. Unfortunately many of the recent decisions regarding interest rates, vital for lowering the financial costs of companies have not been conducive to promoting a higher rate of industrial investment and growth. The RBI has actually raised the repo rate in its last policy review on September 20th by 250 basis points, to 7.5 per cent and this will affect investors’ sentiments. As has been the experience in the past of many countries, tinkering with the interest rate cannot offer an effective antidote to inflation. There has to be supply - side measures also which will effectively increase the supply of those goods (especially food items) for which there is excess demand.
It is also the infrastructure and the high transaction costs that need to be improved to boost exports further. There will have to be easier clearances for trade between neighbouring countries and more jobs could be created on both sides which will lead to greater traction in the demand for goods and services from new wage earners. Fortunately, agricultural demand is likely to go up.
Thus we need to be cautious about favourable signs like a reduction of the trade deficit. Because though it is going to reduce one of the disturbing parameters that are slowing down growth, it could also be indicative of slack industrial activity.
Reviving the economy should be the first priority of the government now. There is need for a more proactive role of the government in trade facilitation and investment promotion. But with general elections so close at hand, will that be possible? Besides, gold imports have to remain low for trade deficit to decline further.
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