Growth remains sluggish, inflation sticky while trade data provides some relief The India growth story continues to face headwinds as the first quarter of FY14 comes to an end with growth largely remaining elusive, inflation sticky while trade data providing some silver lining. The rupee which largely depicts the health of the nation has thus borne the brunt of the weakening economic scenario which in turn has further complicated the equation. IIP data points to continued weakness: The industrial production data released for the month of June registered a contraction of 2.2% y-o-y. This follows the prior month contraction of 1.6%. Manufacturing continued to remain under pressure contracting by 2.2% in Jun-13 and contracting by 1.2% in Q1FY14. Basic goods segment registered a de-growth of 1.9% y-o-y in June while capital goods segment de-grew by 6.6% y-o-y. Consumer durables contracted by 10.5% in June vs 9.1% growth registered in the same month in 2012 while consumer non-durables segment was the only segment which grew by 5% in Jun-13 and by 6.6% in Q1FY14. Overall, growth has remained elusive as was further indicated by the HSBC PMI data. Consumer inflation remains elevated: Despite sluggish growth, inflation continues to remain sticky. The CPI inflation for the month of Jul-13 stood at 9.64% on an all India basis while urban inflation inched above the 10% mark. Food and beverages continued to witness double digit inflation of 11.24% with vegetables, cereals and protein products witnessing highest inflationary pressures. Fuel and light inflation too stood at 8.39% while clothing, bedding and footwear category witnessed turned dearer by 9.39%. Lack of supply side responses particularly on the food inflation front has led to increased pressure on consumer price inflation. Government finances witness deterioration: The Q1FY14 review of public finances points towards some level of deterioration as far as the fiscal health is concerned. Revenue collection growth has lagged budget estimates in the first quarter while expenditure continues to increase in line with the budget estimate. As per the data released by the Finance Ministry, the total revenue receipts in Q1FY14 stood at 11.1% of FY14 budget estimate as compared to 12.7% in Q1FY13. Both revenue and capital expenditure witnessed an increase y-o-y as a result of which total expenditure as a % of FY14 budget estimate in Q1 stood at 23% as compared to 20.9% in Q1FY13. Gross fiscal deficit as a result of which stood at 48.4% of FY14 BE as compared to 37.1% in Q1FY13. Slow down in tax receipts was witnessed across the board including corporate and individual direct taxes and indirect taxes. Total outstanding internal debt as a percentage of GDP stood at 37.1% in Q1FY14 as compared to 37.4% in Q4FY13, however, the proportion of external debt as a % of total debt witnessed an increase of 46 basis point moving up from 8.86% at the end of FY13 to 9.30% at the end of Q1FY14. Rupee bears the brunt but what is the way forward: The rupee as a result of which has borne the brunt depreciating significantly in Q1FY14, primarily on the back of sluggish growth, high inflation and deteriorating twin deficits. With an aim to provide some support to the falling rupee, the RBI and Finance Ministry have taken various monetary and fiscal steps though none seem to be working as the rupee requires a medium term fix. The most recent debate about whether or not the government should issue quasi government or sovereign bonds has led to a clear divide between policy makers. One camp is of the opinion that a similar experiment in 1990’s showed that the nation ended up paying higher interest rates on such debt and that it should be issued when the economic prospects of the country are buoyant while the other camp is of the opinion that such issue will help attract the much needed dollars into the country. Even though, we are no experts on this subject, but are of the opinion that steps which increase the indebtedness of the country should be avoided as far as possible, rather, measures such as providing increased export incentives should be unveiled which lead to a sustainable flow of the dollar which does not need to be repaid in the future.
Posted on: Mon, 12 Aug 2013 14:38:17 +0000
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