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Need for sustaining growth momentum

The outlook for the economy this year is being reassessed in industry, money and stock market circles in the light of none too pleasant happenings in the European Union. The UPA Government also is struggling to contain food inflation while non-food inflation is rising with world prices for several imported products above internal parity.

Both Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee are, however, quietly confident about an 8.5 per cent growth in GDP this year with the prospect of the agriculture and allied activities sector making a handsome contribution of 5.8 per cent. The optimism about a rebound in food and cash crops in the 2010-11 agricultural season is based on hopes of a satisfactory southwest monsoon.

As forecast by the Meteorological Department the onset of the monsoon in Kerala was even slightly earlier than predicted. But its progress has been retarded to some extent by the cyclones in the eastern and western regions. It has, of course, resumed in Kerala and elsewhere. It is still emphasised that the monsoon will be normal and agricultural production may well equal if not surpass the record of 2008-09.

The growth in industrial output has been 10.4 per cent in 2009-10 against 2.8 per cent and 8.5 per cent in the two previous years. The details for April too have been impressive as double digit growth in output has been recorded for the seventh consecutive month. The manufacturing sector has increased its output by 19.4 per cent with 15 out of 17 industrial groups making more effective use of capacity. The output of machinery and equipment other than transport zoomed by 55.6 per cent while the mining sector's share was higher by 11.4 per cent and electricity's by 6 per cent. The increase in the composite index for the whole year is estimated at 10.4 per cent.

Encouraging exports

Major industries are raising their operating ratios in response to improved domestic and export demand. The trends under this head since November last year have been positive and the decline in total exports last year was only 4.7 per cent against 26 per cent in April-October last year.

The performance in April this year has also been heartening, showing a 36.2 per cent rise to $16.89 billion from $12.40 billion a year ago. However, with rising prices, oil imports were costlier at $8.08 billion against $4.74 billion. As non-oil imports too were higher at $19.23 billion ($14.31 billion), the deficit has risen by 56.69 per cent to $10.42 billion ($6.65 billion). Since it is anticipated that the export target of $200 billion may be realised even with a likely slowdown in shipments to EU, the trade gap for the whole year may not surpass the figure for 2008-09. This is because it is unlikely that negative trends will emerge as in April-October last year. The current account deficit too may not disclose any significant increase over 2009-10 as net invisible receipts should make a better showing with many software companies increasing their forex earnings. Other services sectors will also be doing better. However, foreign exchange inflows have not been encouraging in April-May because of the developments in the EU and the apparent drop in revaluation may be due to the strengthening of the greenback. The rupee has thus not been maintaining the earlier uptrend though even at Rs.46.73 vis-à-vis the dollar there is a net gain as compared to the external parity early this year.

Forex inflows

After the confusion in the EU subsides India's forex reserves may rise as efforts are being made by the government and industrial enterprises to mobilise funds through loans and issues of GDRs, ADRs or convertible bonds. The Deepak Parekh committee has called for efforts to encourage inflows from foreign insurance and pension funds and other enterprises to help corporates in the infrastructure sector, particularly in power, communications, transport and allied projects.

As part of the initiative, it has been suggested, an amount of $2 billion could be utilised out of the existing foreign exchange assets for financing imports of capital goods and intermediate products as the case may be. This suggestion is not novel. Some time back it had been proposed that an amount of $5 billion be used out of reserves for meeting the requirements of the Central public sector and other enterprises.

Since the emphasis is now on minimising the fiscal deficit the draft on forex resources may be attempted only for meeting the requirements of those having forex expenditure. The garnering of forex and rupee resources in the coming months by the Central Government and industrial enterprises will be challenging as there will be a competing demand from other sectors. The Planning Commission is understandably keen on ensuring the requisite resources and has suggested creating the necessary climate for utilising as much as Rs.50,000 crore through different instruments and needed incentives.

Huge requirements

The Finance Ministry as well as the RBI will have to adopt measures for augmenting rupee and forex resources. Significantly, there are indications of declining liquidity in the banking system and stringent conditions after November if forex inflows do not improve as in 2007-08 and cash reserve ratio is not reduced suitably for increasing lendable resources.

In the 12 months ended May 28, the growth in deposits was less pronounced at Rs.5,92,861 crore against Rs.7,17,610 crore while bank credit has risen smartly to Rs. 4,97,797 crore (Rs.3,74,398 crore). Fresh investments in government and approved securities were necessarily lower at Rs.1,72,732 crore (Rs.2,67,760 crore). As a result of a hike in CRR on two occasions, total cash balances were higher at Rs. 95,192 crore against a negative Rs. 87,022 crore. Resources of banks will get augmented to some extent if the growth in GDP turns out to be 8.5 per cent plus, but there will have to be stimulation of inflows of forex resources if the requirements of all classes of borrowers have to be met without difficulty. It is also important to take early decisions regarding issues of tax free bonds by managements of enterprises in the infrastructure sectors. Only then can income tax assessees invest in these financial instruments.

How RBI can help

The absence of a let up in food inflation rate should not deter the monetary authorities from taking helpful decisions to avoid stringency in the money market. Food inflation will abate noticeably after the kharif harvest. Even now the statistical position in respect of fine cereals is comfortable. In spite of a shortfall in rice output, procurement has been only slightly lower at 26.90 million tonnes up to the middle of June. Actually the target for the whole marketing season has been revised to 30 million tonnes. Buffer stocks of wheat are at high levels even with a slack in procurement purchases after April.

Aggregate stocks of rice and wheat may exceed 60 million tonnes in mid - July. The problem therefore relates to the storage of huge quantities in good condition. Further decline in the food index will be facilitated if prices for pulses, vegetables and fruits drop to reasonable levels. The Finance Ministry too should not be in a hurry to withdraw further incentives in the stimulus packages as the estimates of revenues from direct and indirect taxes will be realised if the industrial and services sectors are helped to raise their output and earnings.

The non - tax revenues too may register a handsome increase thanks to the spectrum and broadband auction bonanza of around Rs. 1 lakh crore. It is imperative that outlays on projects in the infrastructure and core sectors are stepped up in a big way if the anticipated double digit GDP growth is to materialise in 2011-12 and subsequent years.

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