High government spending should stimulate recovery
The drastic cuts in repo and reverse repo rates and the lower cash reserve ratio will bolster demand over coming months through lower interest costs and improved liquidity.
The Indian economy has started experiencing for some time the impact of the deepening recession in the U. S., the U.K., Europe and elsewhere. The country’s exports have thus been affected and for four months in succession (October-January) forex earnings have been trailing last year’s levels. Export declines were 13.1 per cent in October, 9.9 per cent in November, 1.1 per cent in December and as much as 15.9 per cent in January this year.
As oil prices declined noticeably only from December, the trade deficit was fairly high in October-November. However, the details pertaining to January are significant. In spite of a sharp drop in export earnings the trade deficit came down to $6.07 billion from $9.9 billion a year ago. Reduced forex earnings were due mainly to the sharp depreciation of the rupee against the dollar and other major currencies. Rupee exports were actually higher by 4.3 per cent. But this was not adequate to offset the effect of the drop in value of the rupee. The rupee cost of imports got exaggerated by 24 per cent. This would have accentuated inflationary pressures but for the sharp fall in global oil and other commodity prices.
The export target of $200 billion for 2008-09 cannot be realised. It is now expected to be reached in 2009-10 as the rupee is expected to firm up once the new government is sworn in and there may be a reversal of forex outflows after some time.
Industrial output down
The performance of the industrial sector too has been disappointing. Barring November a negative trend has been witnessed since October. In January, there was a drop of 0.5 per cent against a growth of 6.2 per cent last year. The growth in April-January was a bare 3 per cent against 8.7 per cent.
2009-10 may be better
There is guarded optimism about the coming year in some quarters. The industrial and financial climate is expected to benefit from the huge tax concessions and high government spending. Reports indicate that the tax concessions for Rs. 60,000 crore in a full year and those announced after the interim budget have had a stimulating impact. The latest concessions will cost the Exchequer Rs. 23,000 crore in a full year and Rs. 3,000 crore in 2008-09.
The drastic cuts in repo and reverse repo rates and the lower cash reserve ratio will bolster demand over coming months through lower interest costs and improved liquidity. The CRR cut, payments under the loan waiver scheme and provision of refinance facilities will be releasing as much as Rs. 2,45,000 crore. Already in February-March, sales of automobiles, consumer electronic items and medical services have been distinctly improving. Besides, Pranab Mukherjee, holding the finance portfolio, has announced higher Plan and non-Plan expenditure in his interim budget for next year.
A larger net market borrowing of Rs. 2,61,972 crore (Rs. 1,00,571 crore) will not affect the financial sector as Rs. 81,781 crore will come indirectly from immobilised balances under the Market Stabilisation Scheme. The tax concessions announced before March will be available in large measures in 2009-10 as well. There will be a saving under subsidies of Rs. 28,311 crore. The borrowing programme for next year may of course be more difficult as the amount will be higher by Rs. 46,675 crore. The release of immobilised funds under MSS will be only Rs. 48,036 crore. There will also be no further drawing down of cash balances, which was a feature of 2008-09. While the fiscal deficit will be rising to 6 per cent from 2.5 per cent in 2008-09, that for 2009-10 will be lower at 5.5 per cent because of the expectation of higher GDP growth.
The fear of increased inflationary pressures in the coming months may not be justified. The inflation rate is only 2.43 per cent for the week ended February 28 against the peak of 12.63 per cent last August. With the agricultural sector performing well and high buffer stocks, prices of primary products may be held in check.
Also, imported edible oils and pulses may be cheaper and there may be the additional benefit of a firmer rupee with the expected return of foreign investments. Oil imports will be substantially cheaper along with non-oil imports. The current account deficit will not thus add to the balance of payments deficit as net additions to foreign exchange assets also may be significant.
The happenings in the later half of 2009-10 and indeed after June will have great significance. If the budget proposals contain new features and agricultural production in 2009-10 season also is good, the heavy tax concessions and high government spending can have a stimulating effect. The economy can even hope to achieve a higher growth than in 2008-09. GDP growth this year is placed at 6.5-7 per cent.P. A. SESHAN