Triple whammy

The Pak Banker - - Front Page - C. R. L. Narasimhan

IT is fairly com­mon nowa­days to re­ceive un­flat­ter­ing re­ports on the econ­omy. Af­ter all, the slow­down in the econ­omy is all too ev­i­dent. Pe­ri­odic re­ports, both of­fi­cial and un­of­fi­cial, have re­cently tended to fo­cus on the neg­a­tive as­pects. How­ever, re­ceiv­ing three sets of wor­ri­some eco­nomic data on the same day is some­thing un­usual.

On Novem­ber 12, the monthly in­dus­trial out­put data, re­tail in­fla­tion for Oc­to­ber as well as the trade fig­ures for that month were re­leased. All of them re­veal facets of the slow­down, and the chal­lenges pol­icy-mak­ers face at this junc­ture.

To take the trade fig­ures first, dur­ing Oc­to­ber, mer­chan­dise trade deficit, the ex­cess of im­ports over ex­ports, was $21 bil­lion, a record for any in­di­vid­ual month. For the April to Oc­to­ber 2012 pe­riod, cu­mu­la­tive trade deficit has gone up to $110 bil­lion. At this rate, bar­ring any ma­jor change in the trends of ex­ports and im­ports, it could eas­ily touch $200 bil­lion, even higher than the $185 bil­lion last year. In­dia has gen­er­ally im­ported more than it ex­ported. Trade deficit on mer­chan- dise ac­count is the rule. But apart from its sheer size what makes its present level men­ac­ing are the fol­low­ing: Oil and gold im­ports ac­count for a sub­stan­tial part of the im­port bill, and their share has been ris­ing. These are not un­usual. Pe­tro­leum im­ports are in­elas­tic, not sus­cep­ti­ble to changes in price.

Gold im­ports, which surged ahead of the fes­ti­val sea­son, might pos­si­bly mod­er­ate but the longterm so­lu­tion to re­duce its im­ports is to con­di­tion do­mes­tic de­mand for it.

En­cour­ag­ing fi­nan­cial sav­ings in the place of buy­ing gold or the jew­ellery is one pos­si­ble so­lu­tion but for a long time to come, the fas­ci­na­tion for phys­i­cal gold among house­holds will not cease.

What mat­ters equally are nonoil im­ports, which have, over AprilOc­to­ber, de­clined by 82 per cent even while oil im­ports are up. Im­ports of cap­i­tal goods, in­ter­me­di­ate prod­ucts and other items needed for in­vest­ment in In­dia have de­clined along with other non-oil im­ports. This is in­ter­preted to be a sure sign of the slow­down.

In­dian ex­ports have been af­fected by the con­tin­u­ing eco­nomic woes of the U.S. and the Euro­pean Union, which re­main the two prin­ci­pal mar­kets.

Un­der the cur­rent for­eign trade pol­icy regime, In­dia has sought to di­ver­sify its trade to non-tra­di­tional mar­kets and to prod­ucts, but with world trade it­self con­tract­ing, such strate­gies might pay-off only when more nor­mal con­di­tions re­turn.

An­other in­ter­est­ing fea­ture has been the im­pact of ru­pee move­ments on In­dia's trade vol­umes.

Nor­mally, a weaker ru­pee should give a fil­lip to ex­ports but this time ru­pee de­pre­ci­a­tion does not ap­pear to have ben­e­fited. Rea­sons for this are worth ex­am­in­ing in de­tail but one plau­si­ble ex­pla­na­tion might be that amidst all the volatil­ity in the dol­lar-ru­pee ex­change rate, it was not pos­si­ble to man­age a hedg­ing strat­egy.

On in­fla­tion, there were two re­ports, both re­lat­ing to Oc­to­ber, the one on re­tail in­fla­tion at the be­gin­ning of the week and the other the monthly WPI (whole­sale price in­dex) in­fla­tion in the course of the week. Re­tail in­fla­tion, based on a new, broad-based con­sumer in­dex, rose to 9.75 per cent, on the back of a sharp in­crease in prices of su­gar, pulses, veg­etable oils and ed­i­ble oils.

While this seemed to vin­di­cate the Re­serve Bank of In­dia's (RBI) stand in not sig­nalling a softer in­ter­est rate pol­icy, the news on WPI in­fla­tion which came a few days later was more pos­i­tive for those clam­our­ing for lower in­ter­est rates. WPI in­fla­tion de­clined sharply to 7.45 per cent in Oc­to­ber from 7.8 per cent in Au­gust. Es­pe­cially note­wor­thy has been the fact that slow de­mand-side pres­sures have caused non-food man­u­fac­tured in­fla­tion (core in­fla­tion) to de­cline to 5.2 per cent from a peak of 5.8 per cent in Au­gust. WPI in­fla­tion has been the bench­mark the RBI has been re­ly­ing upon, even though it has ad­mit­ted that it is not the most suit­able one.

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