Sunday, January 19, 2014

2014 A Tough Year for the Indian Economy

A tough year ahead for the economy:
First decade of the century had witnessed greater height and steeper fall in global economy the same has been true for Indian economy. The greatness of Indian economy, though at pains, is that it kept on expanding twice the global economic expansion rate during this period. Some even say that the economy is moving more by sentiments than fundamentals, because we do not have the rate of savings and investments moving up as was the case five years ago.

Sustained wholesale inflation of 7% and retail inflation of over 10% indicates the underlying robust demand and inadequate supply in the system. This unfulfilled demand will pave the way for Indian economic leadership in this decade. Free fall of Indian rupee, triggering currency swap arrangement with some countries means nothing but the beginning of the globalization of Indian rupee in a small way.

The stubborn inflation and free fall of rupee indicates inefficiency and waste built into our economy, which cannot be managed by monetary or economic policies alone; at the most these can be enablers to some extent. The Commerce Ministry, Government of India, has finalised arrangements with some 23 countries with whom Indian can trade in local currencies. In simple terms, the importer or exporter in both the countries has to quote and receive settlements in their own currencies. No third country currency is involved, thereby eliminating the need to worry about exchange variations, for a good beginning!

India's emphasis has been to persuade countries to come to this arrangement, where India has substantial or sizeable trade deficit with that country. By doing so, the dues are still payable in rupees, thus saving the need to settle in "foreign exchange" in say, US dollars, Euros, or whatever. Once the Finance Ministry approves the country with whom such an arrangement would be mutually beneficial, Commerce Ministry takes over the responsibility to start the bilateral talks to arrive at a suitable agreement.

It may be noted that, in the first half of the current fiscal (2013-14), there has been a depletion of $10.7 billion in foreign exchange reserves, purely due to the decline in net capital inflows.
Fortunately, in this basket, there are leading, oil exporters such as Angola, Algeria, Nigeria, Iran, Iraq, Oman, Qatar, Venezuela, Saudi Arabia and Yemen. At the moment, efforts are being made to increase our exports to Iran, Iraq, Oman, Qatar and Saudi Arabia. Iran has a credit balance of Rs50000crore (or about $6 billion), and it is in our interest to closely work with that country to meet their needs, in terms of products, services and turn-key jobs.

In the list of non-oil exporters, but with whom, we do have substantial trade, we have advanced countries like Japan, Russia, Australia, South Korea besides Singapore, Indonesia, Malaysia, Mexico, South Africa and Thailand. Recently, Japan increased the volume from $15 to $50 billion so that trade can flourish between two friendly nations, without involving third currencies. It is essential that exporters take advantage of the present arrangements and strengthen the government's effort, by strictly adhering to the rupee quotations for trade.
Notwithstanding all these efforts, April-November 2013 indicates declining exports. This could be because of the world economy still suffering from an under-consumption bias because of low and declining share of wages in GDP in all major advanced economies including the US, Germany and Japan, as well as China.

Our current account deficit has narrowed down to almost 2% now, as compared to 4.5% in the first half of last year because of putting brakes on gold imports. However, the World Gold Council states that smuggling of gold has surged. There is need for fresh thinking on export import strategies. There is need to promote exports through trade exhibitions in all the rupee-trade countries particularly like Iran, Nigeria, Qatar, Saudi Arabia, Japan, South Korea, Mexico and Venezuela.

Fiscal deficit has already touched 93% of projections for the current financial year. There are huge election expenses to be met. Again, the Governments, both the State and Centre are yet to commence the implementation of the Food Security Act 2013 that has clear hole in the fiscal balance. Then there are further releases of wage hikes for MNREG and salary and DA hike for the State and Central Government employees. The Central Government is therefore keen on pushing all expenses from January to March 2014 to the next year. It is the post-election Government that will have burns under its feet. In fact, Raghuram Rajan has already warned that it is imprudent to postpone payment of government bills to the next fiscal. But the government is in no position to listen.

Several PSUs are not able to honour the payments to their vendors who are mostly MSMEs within the contracted 90days and this has been accentuating the NPA portfolio of MSMEs in most Banks. When the provisions rise on this count for the Banks, the dividends that are paid in advance to the owner, GOI with a view to bridge the fiscal deficit on the insistence of the FM would further dent into the future balances on this count. One gets a genuine doubt over the government indulging in these luxuries, as it is more than aware that it would not come to power!!

The next fiscal that sees the introduction of GST and Direct Tax Code could see some stability in stock markets. It is also quite likely that the global scenario of stock markets also renders more hope than the current. GARP (Jan5) predicts, of course, a year of hope on stocks backed by global growth. Adds however: “Reality has a way of defying expectations. Few forecast a 30 percent gain for stocks this year. No one really knows what 2014 will bring.” Being vulnerable to Developing economies including India could suffer a setback due to the likely sharp revival anticipated in Europe and US and the resulting shift in investor interests.

In so far as commodities are concerned, oversupply could keep the prices weak in 2014. Gold is likely to retain its glitter.

Agricultural growth of 4 percent this year has behind it a continuing decline of growth in manufacturing and mining sectors. The marginal rise in the power sector is no insurance for a sharp growth in the current year. The current fiscal may see 5 percent still but the hope of the future depends on more of politics than economics.