The economy is in the throes of a crisis, which, though not akin to 1991, has proved to be intractable so far. The series of measures announced by the Reserve Bank of India just before Pranab Mukherjee laid down office as the Finance Minister were aimed at encouraging forex inflows, and thereby reverse the downtrend in the value of the rupee vis-à-vis the dollar and other currencies. Soon enough, it was felt that other measures were needed to revive the economy.
After Manmohan Singh took over the finance portfolio, new measures aimed at stimulating export growth and industrial output have been announced. These will take time to yield the desired results.
In the meantime, the rupee recovered from a record low of Rs.57.32 to below Rs.55 for a while, with active intervention of the monetary authorities. Thereafter, the rupee value has been volatile. The objective of the RBI would seem to be to prevent a further slide of the rupee and stabilise its value around Rs.55 or thereabouts. Even at this level, it will be a stiff task to increase exports by over 20 per cent in dollar terms in 2012-13 as the prospects for achieving a high level of exports of agricultural products are not encouraging. Even though export growth was satisfactory at 23.6 per cent in 2011-12 (according to RBI data), the trade deficit was at a record $189.7 billion in 2011-12 against $ 130.14 billion in 2010-11. The current account deficit was $78.2 billion against $ 46 billion after utilising net invisible receipts. As the residual deficit proved to be high, it became necessary to draw down reserves by $ 12.84 billion. It is postulated that exports should increase by 20 per cent in 2012-13 presumably under the impression that the depreciation in the value of the rupee would get reduced after the measures taken to stimulate forex inflows bear fruit. Even so, the effort will be taxing as the rupee depreciated sharply after September 2011, and the value was Rs.50.32 on March 30, 2012 against Rs. 44.44 in April 2011.
However, the details relating to foreign trade for April-June 2012 are suggestive of imports being under control. Exports registered a negative growth of 1.7 per cent at $ 75.20 billion. However, imports dropped by 6.10 per cent to $ 115.26 billion, and the trade deficit contracted to $ 30.06 billion from $ 45.78 billion. It is too early to estimate how exports will grow as there are many imponderables. It also remains to be seen whether the volume of exports can be improved to hit the target of $ 350 billion, and the trade deficit contracted suitably. This is because the contribution of agricultural products to exports growth may not be of the dimensions of 2011-12.
Any shortfall in the growth of agricultural products would have to be offset by higher shipments of industrial products. At the same time, there has to be a larger contribution of invisible exports to boost forex earnings and bring about a significant reduction in the current account deficit. This is absolutely necessary though much depends on the reversal of the downtrend in rupee value. The UPA Government is under compulsion to stimulate industrial growth. Even in 2011-12 when the GDP growth was 6.5 per cent, the industrial output increased by only 5.5 per cent against 8.2 per cent. Several factors have been impeding the functioning of the industrial sector with shortage of power and coal particularly inhibiting output and increasing expenses.
The authorities are making frantic efforts to boost industrial production with several incentives. But the output grew by only 2.4 per cent in May while the cumulative growth for April-May was only 0.8 per cent against 6.2 per cent in the year-ago period. The growth for the current financial year has not, thus, been quite encouraging especially as it is felt lately that the services sector may find it difficult to increase its contribution to GDP growth.
The expected output for 2012-13 is not, thus, promising as the purchasing power of the farming community and rural population may even register a decline and thereby a contraction in demand for durables and non-durables. Because of the wayward behaviour of the monsoon so far, it is feared that the output of coarse cereals, pulses and oil seeds will be badly affected and the deficit in the latter two products may even increase, thereby necessitating larger imports for obviating an accentuation of inflationary pressures.
The general inflation can be prevented from rising to above 7–8 per cent. However, this will depend on the recovery in the external parity of the rupee for contracting the current account deficit to around 3.5 per cent. A clear picture on this front will emerge only in the second half of 2012-13.
The economy has the requisite resilience and the growth recession can be reversed if confidence in the outlook for the rupee is restored and forex inflows get augmented. The prevailing sentiment in the bourses is not conducive to attract forex inflows in larger volumes, and also infuse confidence among retail investors. The need of the hour is to step up outlays in the vital segments of the infrastructure sector and eliminate the bottlenecks in stepping up power generation and improving the functioning of the mining sector. It has, thus, become imperative to augment the pool of resources as even the availability of rupee funds is grossly inadequate.
The economy can be placed on the growth path only if there is an increase in the forex inflows as in 2007-08.
(The author, retired Financial Editor of The Hindu, turned 99 on July 7. His column, Leo’s News & Notes, first appeared in 1957.)