A sharp deceleration in exports in October is significant in many ways

The most conventional way of gauging the slowdown in the economy is to look at the downward revisions in the GDP forecasts for the year. The most optimistic of the official forecasters has pegged economic growth at no more than 7.7 per cent for 2011-12. Chances are that there would be further downward revisions as the year proceeds.

Many private forecasters are already betting on the economy growing at a much lower pace than what the official estimates suggest.

In India, apart from the CSO's national income statistics, the Reserve Bank of India's growth forecasts are also keenly watched. The Prime Minister's Economic Advisory Council, headed by C. Rangarajan, through its half yearly reports on the economy, is another authentic, purveyor of economic statistics, including those on growth. There are other official and semi-official agencies that dispense such data. All of them are less optimistic than they were at the beginning of the year.

Reinforcing the perception of a slowdown are data emanating from individual sectors that have been released recently. As much as the GDP forecasts, these count. After all, sectoral declines do impact on the macro economy. Besides, they may serve as early warning signals of the risks ahead.

Demand contraction

One such set of data released recently — the trade figures for October of the Commerce Ministry — is significant in many ways. After a long period of heady growth, exports have decelerated sharply, falling to a 12-month low of $19.9 billion in October. On a year-on-year basis, exports have grown by 10.8 per cent, the slowest in two years. From a spectacularly high 82 per cent in July, shipments declined to 44.25 per cent in August and to 36.36 per cent in September.

Clearly, the sharp demand contraction in the principal export markets, the U.S. and Europe, is beginning to impact on the trade figures. But thanks to some sterling performance in the earlier months, exports have surged 46 per cent to touch $179.8 billion in the April-October period. Progress from here is going to be difficult as the Commerce Secretary has admitted. The annual target — fixed in more optimistic times — is $300 billion. Exporters received an incentive package from the government recently to help them tide over hard times.

For the macro economy, there are several implications. The recent export performance has been commendable, more so because it has been achieved in the face of several obstacles. Apart from the recession in the U.S. and Europe, exporters have had to reckon with some unfavourable macro variables such as high interest rates and until a few months ago a strong rupee. Ironically, the sharp depreciation in the home currency, it is claimed, has not benefited the exporters either. Many of them, including their bankers, were caught unawares and could not manage their forex risks on time.

Equally significantly even as exports are on a declining trend, imports have remained high. In the first six months of the year, imports have gone up by 31 per cent to $273.5 billion. The trade deficit has touched $93.7 billion at the end of seven months. Chances are that the deficit may balloon as the year progresses. The import bill will continue to be large. Petroleum prices will remain sticky at current high levels. The acute shortage of coal for power plants has necessitated large imports, which will continue. The demand for gold and silver both for investment and jewellery is unlikely to abate.

The upshot is that the widening merchandise trade deficit will make it difficult to contain the current account deficit within a comfort zone of, say, 2.7 per cent. (As estimated by several experts). This means that the economy will continue to be dependent on volatile capital flows for bridging the balance of payments. An economy slowing down is less likely to attract the right kind of capital flows.

Lower tax collections

There are other indicators of the slowdown. Tax collections, both direct and indirect, are lower. Partly because of that, the fiscal deficit may not be contained as budgeted at 4.6 per cent of the GDP.

Industrial output figures for September, released on Friday, showed manufacturing growth at just 2.1 per cent. The Index of Industrial Production itself grew at 1.8 per cent, its lowest in two years.

Rating action criticised

One of the consequences of the slowdown has been the changed perception of a rating agency on Indian banks. Moody's, one of the top three rating agencies, downgraded the outlook on Indian banks from stable to negative. The argument is that as the economy slows down, more bank loans will become bad. The increased provision will naturally impinge on profitability. Further, in a rising interest rate scenario, banks' interest margin will shrink contributing to lower profitability. Moody's action has been criticised for being hasty and not taking into account the inherent strengths of India's largely government-owned banks, which, unlike their better known peers in the developed world, acquitted themselves creditably during the global financial crisis, no doubt backed by sound regulation.

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