After a long, long time, there is some favourable news on the economy. The International Monetary Fund (IMF), in the latest edition of its flagship publication — World Economic Outlook — says that the Indian economy has bottomed out, meaning that the worst is over.
It projects the domestic economy to grow by 5.7 per cent in 2013, which, though slightly lower than its earlier estimate of 5.9 per cent, avoids the downright pessimistic undertones of many other forecasts.
Facing structural challenges
The Indian economy will benefit from a hopefully better monsoon, external demand, solid domestic consumption and recent policy changes.
However, risks remain as the economy faces ‘structural challenges’, which can lower potential output and keep inflation at elevated levels. The IMF’s reading of the Indian economy is significant also because the global economy as a whole is not expected to improve substantially. In fact, the IMF has cut its global economic forecast to 3.3 per cent, down from 3.5 per cent in January. The nascent revival of the U.S. economy will be offset by renewed worries in the eurozone. In short, the message from the IMF, though never explicitly stated, is that the Indian economy will do better than the global average.
Whether that really counts in the domestic policy calculations is something to ponder over. High-up in the list of domestic worries has been the burgeoning current account deficit (CAD). In the third quarter of 2012-13 (October-December, 2012) CAD was as high as 6.7 per cent. The yawning merchandise trade deficit, which is behind CAD, is due to a sharp deceleration in exports, while imports of oil, gold and a few other commodities have remained high.
Revival of exports will take time as it depends on growth prospects of India’s principal markets — Europe, the U.S. and Japan.
Sharp fall in gold prices
Meantime, from the point of view of trade deficit, the good news has been the sharp fall in global prices of gold. Considering that global oil prices are also heading lower, has India finally found a solution to the serious Balance of Payment (BoP) problem? By the middle of last week, gold prices had touched a two-year low, having come down by more than a quarter from their peak prices in September, 2011. Equally significantly, many analysts expect the declining trend to continue for a while. Another virtuous outcome from falling gold prices has been the drop in prices of certain other commodities besides oil.
The import bill should, no doubt, ease but no one can say how long the relief will last. The outlook for global oil is naturally conditioned by geopolitical factors, not all of which are favourable. For assessing the outlook for gold, a few points are important. Gold is a hedge against global risks, the refuge currency in times of great uncertainty. As the IMF, among others, pointed out, global risks are far from being subdued. Second, in India, gold imports are driven equally by jewellery as for investment. Passed on as heirlooms in many families, the demand for gold jewellery is unlikely to decline appreciably. Even from the investment perspective, gold is likely to bounce back once the present fall leads to a correction. According to some brokerages, the time to buy — not to sell — gold and gold-linked instruments has already come.
The message is clear. Falling gold and commodity prices will reduce CAD, but they are not the real solution which depends on a revival of export growth. For that to happen, the industrial sector must revive. In that context, the news of a sharp fall in WPI (wholesale price index) inflation index to 5.96 per cent in March, the lowest level in three years, is most welcome.
Along with the still weak IIP (index of industrial production) numbers, the fall in inflation ought to induce the RBI to cut its policy rates by at least 25 basis points. However, the textbook scenario of banks charging lower for their loans boosting demand as well as industrial output, might, alas, not be valid.
Good news is most welcome, especially when it relates to falling gold prices and lower inflation. Yet, one has to wait a while to see whether the trends continue and reinforce each other in the process.
narasimhan.crl@thehindu.co.in
