For Indian economy, 2013 has ended on a sombre note. The beginning itself was tumultuous as growth during fiscal ending March, 2013 plummeted to a decade low 5% and current account deficit (CAD) high of 4.8% GDP, US$ 88 billion in absolute terms.
In the third quarter of that year ending December 31, 2012, CAD had hit a scary 6.7% of GDP. Despite reduction in subsequent quarter to a little less than 4%, overall CAD was close to 5%. This was almost double RBI comfort level of 2.5%, reminiscent of 1991 crisis.
Fiscal deficit though lower than target at 4.9% was fortuitous – made possible by huge compression in plan expenditure by Rs 90,000 crores (around US$ 17 billion) and postponement of food and fertilizer subsidy payments by Rs 68,000 crores (US$ 12 billion).
The first quarter of current fiscal ending June 30, 2013 was a huge disappointment with growth decelerating to an abysmal low of 4.4%. In the succeeding quarter ending September 30, it continued to languish at around 4.8%.
The main culprit was declining demand – both investment and consumption – hitting manufacturing sector the most even as services did not remain un-affected. The spill-over of compression in spending by Government (in 4th quarter of 2012-13) aggravated the downslide.
CAD continued to remain in a vulnerable zone despite slow down in growth. This was primarily due to sluggishness in exports even as India was unable to take advantage of green shoots in global economy.
A mere whisper about ‘tapering’ of QE 3 by US Federal Bank in May led to exodus of US$ 12 billion in just 3 months. This brought Indian rupee under tremendous pressure which hit an all time low of US$ 1 = Rs 68 in August, 2013.
Steps taken by RBI in mid July viz., increasing interest rates, tightening liquidity, strict monitoring and control of balances maintained by commercial banks under CRR (cash reserve ratio), restriction on remittances abroad only boomeranged on growth. And yet, rupee continued its downward slide.
Meanwhile, Government on its part identified gold imports as one of the major causes of ballooning CAD. It increased customs duty to a high of 10% (from 4% at beginning of 2013) and introduced the cumbersome 20:80 formula requiring ‘mandatory’ export of 20% of gold brought in by an importer.
Thanks to virtual siege on liquidity and import restrictions – reminiscent of controlled & license raj – and languishing growth, the reduction in CAD in second quarter ending September 30, 2013 to 1.2% of GDP (down from 4.9% in first Qr) is not something to even rejoice – much less to celebrate!
Induction of flamboyant Mr Raguram Rajan as Governor, RBI in September (first week) lifted sentiments. Mr Rajan took steps to bolster inflow of funds viz., ‘concessional swap’ facility and curtail outflow of dollars by letting oil PSUs to meet their demand directly from RBI.
Within 2 months, rupee was brought back to safer zone and in December, 2013 this was hovering in the range of US$ 1=61.5 to 63. Yet, it would be inappropriate to attribute this entirely to above mentioned factors.
A key factor was decision of US FOMC (Federal Open Market Committee) to go for QE tapering in a gradual and calibrated manner. From January 2014, Fed bank will reduce bond purchase by US$ 10 billion from current US$ 85 billion per month. This is much smaller than earlier anticipated cut of US$ 20-30 billion per month.
A slight increase in growth to 4.8% in 2nd Qr (from 4.4% during first Qr) together with an anticipated surge in agriculture GDP growth to above 5% prompted our policy makers to do some crystal gaze. They are now taking of overall GDP growth during current fiscal to around 5.5%. That is an exaggerated notion!
First, there is nothing to show that investment and consumption cycle has bottomed out and that things will rebound in second half. True, Cabinet Committee on Investment (CCI) – a group of Ministers set up by PM to fast track projects – has cleared investments worth Rs 300,000 crores (around US$ 48 billion).
But, to argue that implementation of such projects would give a fillip to growth in current year itself tantamount to indulging in self-deception. Many of these projects would still need to clear hurdles in cob-web of bureaucracy – both at central and state level. Any contribution from these is ruled out.
Second, Government having consumed 94% of its fiscal deficit target during first 8 months of current fiscal (April-November) and its compulsion not to breach red-line of 4.8% for whole year, it is contemplating compression in its investment on a scale much higher than even during last year.
It is likely to reduce plan expenditure by a whopping Rs 130,000 crores (around US$ 21 billion) up 45% from Rs 90,000 crores cut last year. A cut of Rs 30,000 crores (about US$ 5 billion) in non-plan expenditure is also envisaged. Government also intends to defer subsidy payment on oil, fertilizers and food aggregating about Rs 130,000 crores (US$ 21 billion) to next year.
If after all this financial engineering on a monumental scale of Rs 290,000 crores (US$ 47 billion), it claims that containment of fiscal deficit within 4.8% would be a wonderful accomplishment, that would be highly misleading. Rating agencies read through all this and they would remain un-impressed.
Clearly, growth will remain well below 5% mark. True, CAD will be substantially lower (according to FM, less than US$ 50 billion) than last year’s US$ 88 billion. But, that is hardly a consolation given that economy remains mired in ‘STAGFLATION’ (a euphemism for low growth and high inflation).
Through most of 2013, inflation as measured by whole-sale price index (WPI) has hovered much above comfort level of 5%. Inflation at retail level remained in double digit even as food inflation sputtered completely out of control.
In a scenario where Government is sitting on mountain of grain stocks (two-and-half times requirement) and their exports expected to reach historic high, high food inflation is indeed a sad commentary on the way Indian food economy is managed.
If 2013 commenced on a sombre note, dawn of 2014 is marked by turbulence. The economy is tottering and jobs are shrinking. Inflation is eating in to declining income and savings of people. Revenues are declining and subsidies ballooning. Fiscal deficit is increasing to un-sustainable level and is not easy to camouflage!
The investment environment is far from being conducive. Retrospective changes in tax regime are order of the day. The declared intention to set things right on both fronts remains on paper thus far. Government is yet to come out of policy paralysis.
Pricing and subsidy reforms in key areas viz., fuel, food and fertilizers have all been put on back-burner. Government is sitting pretty on Dr Kirit Parekh Committee on oil pricing reforms. For LPG, it is in a retreat mode and all set to increase number of subsidized cylinders from extant 9 to 12. Diesel price hike of Rs 4 per liter is ruled out.
Direct benefit transfer (DBT) much trumpeted reform of UPA is consigned to backyard!
The new Government in May 2014 will have a daunting task to stabilize current shaky Indian economic landscape. Will it be able to live up to the challenge?