Taugh task ahead

K R Sudhaman

Arun Jaitley Finance Minister Arun Jaitley might put up a brave face, but the economic situation on the external front in particular is none too bright. He may laud over the 8.2 per cent GDP growth achieved in the first quarter of this financial year but he will have to resort to tight rope walk to ensure that macro-economic fundamentals are strengthened to ward off a potential economic crisis arising out of free fall of the rupee and ever widening current account deficit (CAD). It is not an easy task.
There appears to be no thinking in the Modi government on how to manage the economy. For the last four and a half years, it had a golden opportunity to resort to big ticket exports reforms to take advantage of global economic recovery. But Modi’s economy managers slept over it and instead, as former commerce secretary Rahul Khullar, says, implicitly pursued strong rupee policy. Banking on low crude oil prices and low CAD resulted in rupee appreciating nearly 20 per cent. Apparently many in the government felt that stronger rupee meant a stronger economy.And did not put in place a policy that could have boosted exports cashing in on the global trade that has registered an impressive growth of over 4 per cent from 2016 onwards. So much so, the bonanza that the government had due to lower oil prices, was frittered away.

Rahul Khullar Jaitley might express confidence of maintaining fiscal deficit at the targeted level of 3.3 per cent of GDP this fiscal but it is going to be challenge. Disinvestment target of nearly one lakh crore rupees for this year appears to be far cry at the moment. His claim of control over inflation might not last long since fuel prices are skyrocketing in the face of free fall of rupee and widening CAD, which may surge towards three per cent of GDP. The Reserve Bank of India, (RBI), might be forced to increase short term rates two more times to rein-in inflation, which is surging in the face of additional liquidity being pumped into the system due to dollar buying to check rupee volatility. Also, core inflation is rising; so is food inflation due to higher MSP.
Falling rupee is a doubleedged weapon. It helps exports, particularly when it is on a recovery mode. But it makes imports expensive. India imports 80 per cent of its crude oil requirement. Free fall of rupee now at over Rs 72 to a dollar and that too volatile, makes it risky for the economy.
CAD is widening in India because of two reasons -- Demonetisation and hasty rollout of game-changing Goods and Services Tax. Both measures impacted the informal sector, which accounts for nearly 80 per cent of the jobs.Nearly 45 per cent of India’s exports are mainly from the labor-intensive sectors like leather, textiles, handlooms, handicrafts, gems and jewellery. This informal sector also caters to the large domestic market as well accounting for nearly 40-50 per cent consumption of manufactured goods.

Upasana BharadwajWith demonetization hitting the informal sector domestic consumption of locally manufactured goods have been substituted by cheap imports from China. Moreover, Modi’s Make in India campaign is not a success story. This is clear from huge imports of electronics goods, which is next only to oil and gold imports. Low export - high import syndrome has therefore widened trade deficit and current account deficit alike, much more than desirable level.Trade deficit is expected to be a record $200 billion and CAD to peak to an unsustainable level of nearly 3 per cent of GDP this financial year.Falling rupee value has worsened the situation.It is time for some correction, which, of course, has to be orderly.

Falling rupee is not too big a worry right now, says noted economist, Raghuram Rajan. The Indian rupee has not depreciated to a worrying level. It has weakened nearly 10 per cent so far this year making it the worst performing Asian currency though. It is dollar’s strength that is depreciating many emerging market currencies. So Rajan’s advice: Stop worrying about rupee. Instead strengthen India’s macroeconomic fundamentals.

Raghuram Rajan Recipe is not checking exports. But export drive through massive reforms, and steps to attract labor-intensiveChinese export units to shift base to India. At the moment most of them are going to Vietnam, Cambodia, and Bangladesh.The Chinese will turn to India particularly in textiles and leather if only the government gives them some incentives, creates a conducive environment and cuts the red tape.
Import controls will not help in finding a permanent solution to the problem of widening CAD. Knee-jerk reactions will lead India nowhere. Boost Exports mantra is what India needs even if the government regulates non-essential imports like high-end items.

The Government recently announced some measures to attract additional capital inflows of $8-10 billion. And eased external commercial borrowing norms. Kotak Mahindra Bank economist Upasana Bharadwaj is not sure how much capital flow will come from these twin steps, which are also aimed arresting the free fall of rupee. Why would there be some capital inflows or why domestic companies borrow from abroad when investment climate is uncertain? This is an issue the government will do to grapple with without much ado.

“I am puzzled…. They (government) seem to be sending out wrong signals,” says Pronab Sen, formerly India’s chief statistician. This gives an impression that the government is panicking, and it will only worry investors and encourage speculators, he remarked.

Even with current account deficit at 2.5 per cent of GDP India could still grow at 8 per cent. If it breaches 3 per cent of GDP, it will be a matter of concern. Falling rupee is not too big a worry right now, says noted economist, Raghuram Rajan. The Indian rupee has not depreciated to a worrying level. It has weakened nearly 10 per cent so far this year making it the worst performing Asian currency though. It is dollar’s strength that is depreciating many emerging market currencies. So Rajan’s advice: Stop worrying about rupee. Instead strengthen India’s macroeconomic fundamentals. Bringing down current account deficit and maintaining fiscal deficit are equally, if not more, important. This will make investors more confident and economy would get kick-started. The government has since announced an array of steps to boost exports. It has removed withholding tax on masala bonds, and relaxed restrictions on nonportfolio investments and on some non-essential imports.

Ajay Sahai Easing of liquidity to exporters at this juncture may be a good idea since exports are looking up in the last couple of months. FIEO director General Ajay Sahai also subscribes to this view.
India’s share in goods exports is under two per cent in the global basket whereas China accounts for nearly 14 per cent. But in Services exports our performance is slightly better at around 3.5 per cent.India must strive to become a global exports hub if right policy is put in place to push both goods and services exports.
A working paper of the Finance Ministry that has been gathering dust for a long while has offered blueprint to take India’s share in World exports to a respectable five per cent. For this India’s goods exports should reach $882 billion by 2022, which means a 27 per cent growth rate in five years. This is not impossible as India had witnessed a much higher exports growth during 2004-09.

Arun Jaitley has an unenviable task, namely avoiding fiscal slippages and warding off the illeffects of surging fuel prices. How he goes about addressing these challenges will have a bearing on Moditva 2019.

India’s goods exports have to be made demand based rather than supply based as at present. Regarding services exports, there is a need for ‘Services from India initiative like the ‘Make in India’ plank to promote manufacturing and exports from the country.

Tariff rationalization is the call of the day. Though average customs duty is around 10 per cent, the real applied duty is around 2.8 per cent because of various exemptions provided. This is creating distortions. India has moved up on the “Ease of Doing Business” index, no doubt but itis still much behind many ASEAN countries in trading across borders. Some specific steps will be in order more so since the US-China trade war is dangling some low hanging fruits.

Well, Arun Jaitley has an unenviable task, namely avoiding fiscal slippages and warding off the ill- effects of surging fuel prices. How he goes about addressing these challenges will have a bearing on Moditva 2019.

(K R Sudhaman, a senior journalist, has been Editor in Press Trust of India and Economics Editor in Financial Chronicle and TickerNews)



		EDITOR'S MAIL EDITOR'S COMMENT ECONOMIC SCENARIO ECONOMIC SCENARIO FRANKLY SPEAKING REALPOLITIK CARING FOR THE NEEDY SIGNS OF THE TIMES UNSMART CITIES M.P POLITICS SOUTHERN TRENDS PUNJAB POLITICS WEST BENGAL POLITICS TIBET’S FUTURE 2+2 DEAL Imran’s naya PakIstan ? PAGE FROM HISTORY PAK POWER GAMES GLOBAL AFFAIRS REVIEW HITS & MISSES SPORTS DIARY BOOK BAZAAR BOOK BAZAAR HONOURING THE BRAVE YOGA IN DAILY LIFE ART OF LIVING Issue:October' 2018 Subscribe Now	ECONOMIC SCENARIO Taugh task ahead K R Sudhaman Arun Jaitley Finance Minister Arun Jaitley might put up a brave face, but the economic situation on the external front in particular is none too bright. He may laud over the 8.2 per cent GDP growth achieved in the first quarter of this financial year but he will have to resort to tight rope walk to ensure that macro-economic fundamentals are strengthened to ward off a potential economic crisis arising out of free fall of the rupee and ever widening current account deficit (CAD). It is not an easy task. There appears to be no thinking in the Modi government on how to manage the economy. For the last four and a half years, it had a golden opportunity to resort to big ticket exports reforms to take advantage of global economic recovery. But Modi’s economy managers slept over it and instead, as former commerce secretary Rahul Khullar, says, implicitly pursued strong rupee policy. Banking on low crude oil prices and low CAD resulted in rupee appreciating nearly 20 per cent. Apparently many in the government felt that stronger rupee meant a stronger economy.And did not put in place a policy that could have boosted exports cashing in on the global trade that has registered an impressive growth of over 4 per cent from 2016 onwards. So much so, the bonanza that the government had due to lower oil prices, was frittered away. Rahul Khullar Jaitley might express confidence of maintaining fiscal deficit at the targeted level of 3.3 per cent of GDP this fiscal but it is going to be challenge. Disinvestment target of nearly one lakh crore rupees for this year appears to be far cry at the moment. His claim of control over inflation might not last long since fuel prices are skyrocketing in the face of free fall of rupee and widening CAD, which may surge towards three per cent of GDP. The Reserve Bank of India, (RBI), might be forced to increase short term rates two more times to rein-in inflation, which is surging in the face of additional liquidity being pumped into the system due to dollar buying to check rupee volatility. Also, core inflation is rising; so is food inflation due to higher MSP. Falling rupee is a doubleedged weapon. It helps exports, particularly when it is on a recovery mode. But it makes imports expensive. India imports 80 per cent of its crude oil requirement. Free fall of rupee now at over Rs 72 to a dollar and that too volatile, makes it risky for the economy. CAD is widening in India because of two reasons -- Demonetisation and hasty rollout of game-changing Goods and Services Tax. Both measures impacted the informal sector, which accounts for nearly 80 per cent of the jobs.Nearly 45 per cent of India’s exports are mainly from the labor-intensive sectors like leather, textiles, handlooms, handicrafts, gems and jewellery. This informal sector also caters to the large domestic market as well accounting for nearly 40-50 per cent consumption of manufactured goods. Upasana BharadwajWith demonetization hitting the informal sector domestic consumption of locally manufactured goods have been substituted by cheap imports from China. Moreover, Modi’s Make in India campaign is not a success story. This is clear from huge imports of electronics goods, which is next only to oil and gold imports. Low export - high import syndrome has therefore widened trade deficit and current account deficit alike, much more than desirable level.Trade deficit is expected to be a record $200 billion and CAD to peak to an unsustainable level of nearly 3 per cent of GDP this financial year.Falling rupee value has worsened the situation.It is time for some correction, which, of course, has to be orderly. Falling rupee is not too big a worry right now, says noted economist, Raghuram Rajan. The Indian rupee has not depreciated to a worrying level. It has weakened nearly 10 per cent so far this year making it the worst performing Asian currency though. It is dollar’s strength that is depreciating many emerging market currencies. So Rajan’s advice: Stop worrying about rupee. Instead strengthen India’s macroeconomic fundamentals. Raghuram Rajan Recipe is not checking exports. But export drive through massive reforms, and steps to attract labor-intensiveChinese export units to shift base to India. At the moment most of them are going to Vietnam, Cambodia, and Bangladesh.The Chinese will turn to India particularly in textiles and leather if only the government gives them some incentives, creates a conducive environment and cuts the red tape. Import controls will not help in finding a permanent solution to the problem of widening CAD. Knee-jerk reactions will lead India nowhere. Boost Exports mantra is what India needs even if the government regulates non-essential imports like high-end items. The Government recently announced some measures to attract additional capital inflows of $8-10 billion. And eased external commercial borrowing norms. Kotak Mahindra Bank economist Upasana Bharadwaj is not sure how much capital flow will come from these twin steps, which are also aimed arresting the free fall of rupee. Why would there be some capital inflows or why domestic companies borrow from abroad when investment climate is uncertain? This is an issue the government will do to grapple with without much ado. “I am puzzled…. They (government) seem to be sending out wrong signals,” says Pronab Sen, formerly India’s chief statistician. This gives an impression that the government is panicking, and it will only worry investors and encourage speculators, he remarked. Even with current account deficit at 2.5 per cent of GDP India could still grow at 8 per cent. If it breaches 3 per cent of GDP, it will be a matter of concern. Falling rupee is not too big a worry right now, says noted economist, Raghuram Rajan. The Indian rupee has not depreciated to a worrying level. It has weakened nearly 10 per cent so far this year making it the worst performing Asian currency though. It is dollar’s strength that is depreciating many emerging market currencies. So Rajan’s advice: Stop worrying about rupee. Instead strengthen India’s macroeconomic fundamentals. Bringing down current account deficit and maintaining fiscal deficit are equally, if not more, important. This will make investors more confident and economy would get kick-started. The government has since announced an array of steps to boost exports. It has removed withholding tax on masala bonds, and relaxed restrictions on nonportfolio investments and on some non-essential imports. Ajay Sahai Easing of liquidity to exporters at this juncture may be a good idea since exports are looking up in the last couple of months. FIEO director General Ajay Sahai also subscribes to this view. India’s share in goods exports is under two per cent in the global basket whereas China accounts for nearly 14 per cent. But in Services exports our performance is slightly better at around 3.5 per cent.India must strive to become a global exports hub if right policy is put in place to push both goods and services exports. A working paper of the Finance Ministry that has been gathering dust for a long while has offered blueprint to take India’s share in World exports to a respectable five per cent. For this India’s goods exports should reach $882 billion by 2022, which means a 27 per cent growth rate in five years. This is not impossible as India had witnessed a much higher exports growth during 2004-09. Arun Jaitley has an unenviable task, namely avoiding fiscal slippages and warding off the illeffects of surging fuel prices. How he goes about addressing these challenges will have a bearing on Moditva 2019. India’s goods exports have to be made demand based rather than supply based as at present. Regarding services exports, there is a need for ‘Services from India initiative like the ‘Make in India’ plank to promote manufacturing and exports from the country. Tariff rationalization is the call of the day. Though average customs duty is around 10 per cent, the real applied duty is around 2.8 per cent because of various exemptions provided. This is creating distortions. India has moved up on the “Ease of Doing Business” index, no doubt but itis still much behind many ASEAN countries in trading across borders. Some specific steps will be in order more so since the US-China trade war is dangling some low hanging fruits. Well, Arun Jaitley has an unenviable task, namely avoiding fiscal slippages and warding off the ill- effects of surging fuel prices. How he goes about addressing these challenges will have a bearing on Moditva 2019. (K R Sudhaman, a senior journalist, has been Editor in Press Trust of India and Economics Editor in Financial Chronicle and TickerNews)