Against a rather dismal economic performance in FY13, there may be indications that the economic fortunes have turned around. Yet, we may have to be sure before drawing any conclusions.
During Q1, the economic conditions turned negative. Growth slowed to 4.4 per cent, and industry continued to slump. The rupee fell as foreign investors withdrew due to possible Fed action on quantitative easing (QE). Households preferred to hold gold. Inflation remained whimsical and monetary policy uncertain. The silver lining was that the government cleared a number of investment proposals. Also, the monsoon forecast was positive, which meant output would be normal, that would temper inflation; rural incomes would be spent on industrial goods.
Inflation worries
But the story did not unravel like this. The first six-eight months do not quite reinforce the belief that we have overcome these problems. First, industry continues to stagnate. Low core-sector growth for October dispels the turnaround theory. Second, investments that have been cleared have not taken off. The debt or credit market does not point to a corresponding demand for funds.
But the story did not unravel like this. The first six-eight months do not quite reinforce the belief that we have overcome these problems. First, industry continues to stagnate. Low core-sector growth for October dispels the turnaround theory. Second, investments that have been cleared have not taken off. The debt or credit market does not point to a corresponding demand for funds.
Third, inflation continues to be high, with consumer inflation in double digits. Prices of food have gone up, affecting consumption of non-food items and eroding savings. Fourth, the RBI perforce has followed an anti-inflationary stance to keep real interest rates positive and encourage savings. But this will delay investment decisions. Fifth, while the Finance Minister sounds credible when he says that the 4.8 per cent fiscal deficit number will not be breached, it will have to be at the cost of capital expenditure. This will affect growth, considering that over 84 per cent of the fiscal space has been used up. Sixth, the lower growth this year (pegged by the Finance Minister at 5 per cent), against the 7.4 per cent Budget assumption, will mean slippage on tax collections. Seventh, while the harvest has been normal, the link with inflation has been severed due to pricing policies as well as high current levels of inflation. The latter enters the pricing decision of farmers.
Gold, the silver lining
A big positive has been the decline in gold imports. While the current account deficit has improved, one should remember that growth in exports has taken place over negative growth rates last year (compared with April-October 2011, they were a tad lower). While the share of exports in GDP (Q2) is high, it is not really a case of exports becoming an engine to growth. The $34 billion of FCNR swap money sounds impressive, but one is still not sure if this is fresh money, churning of existing deposits, or substitution from other NRI deposits or remittances.
A big positive has been the decline in gold imports. While the current account deficit has improved, one should remember that growth in exports has taken place over negative growth rates last year (compared with April-October 2011, they were a tad lower). While the share of exports in GDP (Q2) is high, it is not really a case of exports becoming an engine to growth. The $34 billion of FCNR swap money sounds impressive, but one is still not sure if this is fresh money, churning of existing deposits, or substitution from other NRI deposits or remittances.
There is still hope that consumption would pick up during October-December and some cleared projects will fructify on the ground. Inflation could moderate statistically and a gentle recovery may take place. But there is too much uncertainty.
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