Heartening industrial scene
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Increasing contribution of manufacturing in the recovery process
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Inflationary pressures, mainly on account of shortages in primary products, may not be felt seriously after the rabi harvests begin.
The uptrend in the economy during April-September this year has given rise to expectations in government, industry and stock market circles that the worst phase of the recession in developed countries is over. The UPA Government, for its part, helped tap the potential of the vast domestic market through its three stimulus packages.
All the major industries have been stepping up turnover and profit in the first six months of the current financial year. What is noteworthy is the increasing contribution of manufacturing industries in the recovery process and the composite index has risen by 6.5 per cent in the half-year under reference against 5 per cent a year ago. Manufacturing industries raised their production by 6.3 per cent (5.3 per cent), mining by 8.2 per cent (3.5 per cent) and power by 6.8 per cent (2.5 per cent).
Rising investment
Manufacturers of capital goods have fared well indicating rising investment in ongoing and new schemes by user industries. Consumers of consumer durables also are buying more. It remains to be seen whether the increase in the share of mining and power sectors will be sustained as much will depend on the progress of expansion and new schemes in these vital sectors and availability of long-term funds.
Even so, it is confidently felt that there will be a distinct improvement in productivity and greater emphasis will be laid on timely completion of ongoing schemes. In the meantime, the uptrend in industrial production can be sustained, thanks to unused capacity in some directions. Industrial output is expected to rise by 9-10 per cent soon against 2.4 per and 8.5 per cent in the two previous years.
The process of recovery is also being aided by an improved foreign trade front. Even now the textile industry in all its segments is raising output and exports are slated to rise by 15 per cent though this falls short of usual export earnings.
However, the negative trend since October last year has not been fully reversed, though the rate of decline has come down to 6.6 per cent in October against 33.2 per cent in April this year. Lower export earnings have not, of course, pushed up the trade deficit for the half-year as oil and non-oil import bill has been much less this time.
Care should be taken while interpreting the variations in data for the industrial and external sectors because of the impact of base levels in comparable periods last year.
Thus, first-half exports dropped by 28.5 per cent to $77.86 billion from $108.91 billion in the year-ago period while oil imports cost only $34.81 billion ($63.29 billion) and non-oil imports $89.78 billion ($121.72 billion). The trade gap would have been even lower but for the fact that world oil prices have tended to rise. Imports of crude and petro products led to an outgo of $6.34 billion in September against $3.63 billion in April.
The cost of these products may rise to $45 billion in the second-half, assuming a 40 per cent increase in average costs. The outgo for the whole year may be around $80 billion. Non-oil imports too may be higher at $100 billion, taking the aggregate for oil and products to $190 billion and $270 billion for all imports.
Exports may fetch $90 billion in October-March and the total may be $170 billion. The trade gap may thus be $100 billion or less against $119.06 billion. If the expectations on the foreign trade front in 2009-10 materialise, the balance of payments position will not be unduly strained as in 2008-09. This is because current account deficit (CAD) will be less this time. Besides, there will be a net rise in foreign exchange assets against a drop of $57 billion on this score in 2008-09 as a result of a larger CAD and net outgo on capital account. On the other hand, there may be additions to foreign exchange reserves by over $60 billion, even allowing for a slightly lower CAD in 2009-10. The experience in April-June in respect of CAD was favourable as the gap was only $5.8 billion against $9 billion due to a smaller trade gap and satisfactory net invisible receipts.
A significant feature of the current developments is the anxiety of the Finance Ministry and the monetary authorities to obviate depreciation in reserves to the extent feasible on account of a weak dollar. This is why the gold content of reserves has been augmented with fresh purchases of this metal from the IMF recently.
The net rise in foreign exchange reserves will thus be less pronounced with gold reserves rising to $17.50 billion in the week ended November 20 from $10.80 billion on October 30. The uptrend has been sustained subsequently.
The performance of the industrial sector will be more impressive henceforth, thanks to larger exports. With services sector likely to benefit from the recovery in developed countries, albeit sectionally, the growth in GDP may be 6.5-7 per cent. Latest estimates of the Agriculture Ministry indicate a positive contribution of 1.5 per cent by the agricultural and allied activities sector against a feared negative contribution. The increased yield of rabi food and cash crops may offset to some extent the kharif setback.
Monetary policy
The Finance Ministry plans to withdraw the stimulus packages perhaps gradually from the end of the fiscal year. There should not be any hasty decision on this score as the recovery process will have to be sustained with the requisite minimum sops and particularly a helpful monetary policy.
The banking system is in a position to expand credit in the desired directions and as there is adequate liquidity in spite of heavy borrowing by the Centre and the States. The requirements of larger working capital by industries may be easily met as food credit will not be registering a net rise until October next assuming that the 2010-11 agricultural season will not see a repetition of the happenings of the current season.
Inflationary pressures, mainly on account of shortages in primary products, may not be severely felt after the rabi harvests begin. Fresh decisions by the Finance Ministry as well as the monetary authorities should therefore be helpfully conceived.
There should not also be any inhibiting decisions in respect of forex inflows as the economy needs more investible funds. However, a careful watch will have to be kept on the use of participatory notes.
P. A. SESHAN
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