Poised for an upward move
20 Sep 2013 6:10 PM GMT
Indian economy is like an elephant. It is robust, but wobbles. It moves, but slowly. Even if it gets sick, it is strong in fundamentals. The Economist said, ‘Despite a tumbling currency, India’s economy has got more stable in the past year’. Goldman Sachs’s India chief Sanjoy Chatterjee was assertive on India’s strength to handle the Rupee volatility. Rating agency Fitch revised India’s outlook stable from negative on measures taken by the government to contain fiscal deficit. Japan Credit Rating updates India with BBB+.
These are not delusion in grandeur, when one goes into the facts and figures of fundamentals. There was euphoria with the change of the guard in RBI. The market upshoot. Rupees jumpstart to rebound. Hopes revived for bounce back in growth. This sudden jerk in upturn unleashed that the economic turbulence, erupted by Rupee slide, has slender relation with economic fundamentals. Current account deficit is a concern, but is manageable.
The US quantitative easing scuttled the emerging economies. USA was infusing huge cash stimuli amounting to $85 billion a month. India too benefitted from this pumping of cash in US economy. With the US economy recovering, the Federal Reserve plans to reduce the cash bonanza in phases to zero. With the stopping of cash flows, fresh flows of US Dollar will reduce and older flows will reverse to USA. This shocked the Rupee value, which slashed by 18 per cent in three months from June. It was true that Rupee was the worst to be affected among the emerging economies. But, other emerging economies’ currencies too tumbled. Between June 5 to September 4, Indonesia Rupiah crashed by 13 per cent, Thai Baht by 5.6 per cent, Brazil Real by 9.8 per cent and Malaysia Ringgit by 6.5 per cent. The slip in Malaysia Ringgit was despite the fact that Malaysia was running a surplus current account balance.
When Rupee was crashing, a apocalyptic forecast was that private equity investors and the multinationals, who are the main drivers for FDI in the country, would exit. But the Rupee xenophobia did not last long. Foreign equity investors were alarmed, but were not jittery. They owned about $200 billion. But they sold only $12 billion. FDI spurred by 20 per cent to $7.5 Billion during April to July 2013 from $ 5.9 Billion in April to July 2012.
Then what factors steered the turnaround? Was it only the change of guard in RBI? Probably no. Take the case of current account deficit, which was falacious. From a comfortable zone of 1.5 per cent to 2.0 per cent ratio of GDP, it skyrocketed to 4.8 per cent. But, the veiled factor, which shoot the current account deficit, was gold import. Gold, which is an uneconomic metal and is demanded for bad days security, alone accounted for 61 per cent of current account deficit in 2012-2013. Minus gold import, current account deficit would have been little less than two per cent of GDP.
Government restricted the gold import. It raised the custom duty and imports were made restrictive with riders. The measures impacted the imports of gold and the trade deficit plunged – the main attributer to current account deficit. Trade deficit dropped to US $10.9 billion in August 2013 from $12.3 billion in July 2013 – a big drop by 13 per cent – and far more dip from $14.2 billion in August 2012. India imported only 2.5 tonne of gold in August 2013 against 47.5 tonne in July 2013.
Therefore, India’s current account deficit is not the structural problem. They can be fixed by means of modest reforms, said Raghuram Rajan, newly appointed RBI governor. There are three factors which insulate the stability of Indian economy. They are strong domestic demand, low external debt risk and a large pool of working age population. Spurt in GDP growth during the golden period between 2004-2008 and a moderate growth thereafter ( even though they were more than world GDP growth) was mainly driven by strong domestic demand and the support by the growth in manufacturing sector in tandem. Domestic demand accounts for three fourth of India’s GDP, much of which is private sector demand (nearly 60 per cent). These structural contributions to GDP helps India to edge over other emerging economies. In Malaysia, domestic demand accounts for only 15 per cent, in Thailand it is 22 per cent, in Indonesia it is 68 per cent and in Mexico it is 66 per cent. The strong domestic demand helped India to withstand the Lehman storm, while other export based emerging economies were volatile by the shock.
At present, the underlying problem in the economy is supply constrain, which was compounded by low manufacturing activities. Tight monetary policy arrested the manufacturing growth. Investors were shy and it created an hollow in domestic investment. Institutional weaknesses castigated the manufacturing capability. Slow allocations of natural resources (like iron ore leases), granting clearances and land acquisition complexities dampened the manufacturing initiatives. However, these are not the fundamental economic anemia. They can be addressed by strategic policies with modest reforms, according to Raghuram Rajan.
India needs big investment to build up the manufacturing capacity. Apart domestic investment, FDI plays a significant role in the manufacturing capacity building process. FDI was upbeat till
2011-2012. But, thereafter it tapered on the paranoia on land acquisition complexities and much highlighted corruptions related to 2G licences and coal scam.
India is in a sound position because of its strong economic fundamentals. CAD concern is more of fallacy than economically inflicted reasons. What the country needs at the present juncture is more investment oriented growth. In these perspectives, modest reforms can fix the problems. IPA
These are not delusion in grandeur, when one goes into the facts and figures of fundamentals. There was euphoria with the change of the guard in RBI. The market upshoot. Rupees jumpstart to rebound. Hopes revived for bounce back in growth. This sudden jerk in upturn unleashed that the economic turbulence, erupted by Rupee slide, has slender relation with economic fundamentals. Current account deficit is a concern, but is manageable.
The US quantitative easing scuttled the emerging economies. USA was infusing huge cash stimuli amounting to $85 billion a month. India too benefitted from this pumping of cash in US economy. With the US economy recovering, the Federal Reserve plans to reduce the cash bonanza in phases to zero. With the stopping of cash flows, fresh flows of US Dollar will reduce and older flows will reverse to USA. This shocked the Rupee value, which slashed by 18 per cent in three months from June. It was true that Rupee was the worst to be affected among the emerging economies. But, other emerging economies’ currencies too tumbled. Between June 5 to September 4, Indonesia Rupiah crashed by 13 per cent, Thai Baht by 5.6 per cent, Brazil Real by 9.8 per cent and Malaysia Ringgit by 6.5 per cent. The slip in Malaysia Ringgit was despite the fact that Malaysia was running a surplus current account balance.
When Rupee was crashing, a apocalyptic forecast was that private equity investors and the multinationals, who are the main drivers for FDI in the country, would exit. But the Rupee xenophobia did not last long. Foreign equity investors were alarmed, but were not jittery. They owned about $200 billion. But they sold only $12 billion. FDI spurred by 20 per cent to $7.5 Billion during April to July 2013 from $ 5.9 Billion in April to July 2012.
Then what factors steered the turnaround? Was it only the change of guard in RBI? Probably no. Take the case of current account deficit, which was falacious. From a comfortable zone of 1.5 per cent to 2.0 per cent ratio of GDP, it skyrocketed to 4.8 per cent. But, the veiled factor, which shoot the current account deficit, was gold import. Gold, which is an uneconomic metal and is demanded for bad days security, alone accounted for 61 per cent of current account deficit in 2012-2013. Minus gold import, current account deficit would have been little less than two per cent of GDP.
Government restricted the gold import. It raised the custom duty and imports were made restrictive with riders. The measures impacted the imports of gold and the trade deficit plunged – the main attributer to current account deficit. Trade deficit dropped to US $10.9 billion in August 2013 from $12.3 billion in July 2013 – a big drop by 13 per cent – and far more dip from $14.2 billion in August 2012. India imported only 2.5 tonne of gold in August 2013 against 47.5 tonne in July 2013.
Therefore, India’s current account deficit is not the structural problem. They can be fixed by means of modest reforms, said Raghuram Rajan, newly appointed RBI governor. There are three factors which insulate the stability of Indian economy. They are strong domestic demand, low external debt risk and a large pool of working age population. Spurt in GDP growth during the golden period between 2004-2008 and a moderate growth thereafter ( even though they were more than world GDP growth) was mainly driven by strong domestic demand and the support by the growth in manufacturing sector in tandem. Domestic demand accounts for three fourth of India’s GDP, much of which is private sector demand (nearly 60 per cent). These structural contributions to GDP helps India to edge over other emerging economies. In Malaysia, domestic demand accounts for only 15 per cent, in Thailand it is 22 per cent, in Indonesia it is 68 per cent and in Mexico it is 66 per cent. The strong domestic demand helped India to withstand the Lehman storm, while other export based emerging economies were volatile by the shock.
At present, the underlying problem in the economy is supply constrain, which was compounded by low manufacturing activities. Tight monetary policy arrested the manufacturing growth. Investors were shy and it created an hollow in domestic investment. Institutional weaknesses castigated the manufacturing capability. Slow allocations of natural resources (like iron ore leases), granting clearances and land acquisition complexities dampened the manufacturing initiatives. However, these are not the fundamental economic anemia. They can be addressed by strategic policies with modest reforms, according to Raghuram Rajan.
India needs big investment to build up the manufacturing capacity. Apart domestic investment, FDI plays a significant role in the manufacturing capacity building process. FDI was upbeat till
2011-2012. But, thereafter it tapered on the paranoia on land acquisition complexities and much highlighted corruptions related to 2G licences and coal scam.
India is in a sound position because of its strong economic fundamentals. CAD concern is more of fallacy than economically inflicted reasons. What the country needs at the present juncture is more investment oriented growth. In these perspectives, modest reforms can fix the problems. IPA
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