OCTOBER 12, 2018

By TIOL Edit Team

INDIAN economy is getting caught in a vortex of uncertainty. The election year's twists & turns, coupled with the challenges from external front, have heightened uncertainty. There is no inkling whether global trade frictions & geo-political tensions would fuel prices of fossil fuels & other commodities.

Available inputs relating to India on such developments from multiple directions are disconcerting. We hope decision-makers in the Government are keeping tab on all such feedback. This is essential to take effective steps to contain the impact of complex inter-play of adverse factors on the economy.

What is equally important is availability of dispassionate assessment of economy by Prime Minister's economic advisory council (PM-EAC). Though constituted a year back, the Council has not put in public domain any of its reports, assuming it did submit few reports to PM.

It is indeed disheartening to find that digitally-savvy Government has not yet even evived the website of PM-EAC. We urge PM to nudge the Council to make public its assessment and recommendations on emerging economic challenges. It would be better if PM-EAC is urged to hold open house meeting with businessmen & analysts, apart from occasional Press conference s .

The latest quarterly Consumer Confidence Survey (CCS) released by Reserve Bank of India (RBI) is worrisome. Conducted in 13 major cities, CCS obtained 5,364 responses on households' perceptions and expectations on economic situation, employment scenario, the price situation and their own income and spending.

As put by RBI, "The current situation index (CSI) waned in the September 2018 round reflecting worsening of consumers' perception on the general economic situation and the employment scenario".

CCS' major findings are: 1) the outlook on employment for the year ahead dipping below expectations in the previous round; 2) the majority of the respondents remained highly pessimistic about the price situation: 3) Opinion was almost equally divided on the direction of change in income in the last one year, but the majority felt that income would increase in the next year and 4) CCS portrays reduced optimism on spending by consumers, particularly in respect of non-essential items.

The negativism, however, gets moderated if one goes through other RBI quarterly/bimonthly surveys on 1) Order Books, Inventories and Capacity Utilization Survey (OBICUS) and 2) Industrial Outlook Survey of the Manufacturing Sector for Q2:2018-19.

All surveys should, however, be taken with a pinch of salt as actual developments can get divorced from projections. This has happened in the case of rupee-dollar exchangerate.

RBI's quarterly 'Survey of Professional Forecasters on Macroeconomic Indicators ' released on 5 th October 2018 is a case in point. It says: "The Indian rupee is likely to remain around Rs 72 per US Dollar till Q4:2018-19 .”

The exchange rate has already breached the 74 level, proving professional forecasters wrong.

Another negative input is buried in International Monetary Fund's (IMF's) World Economic Outlook (WEO) released on 9 th October. WEO has reduced estimated Indian GDP growth for 2019-20 by 0.4% to 7.4% from its projections in April 2018.

It notes that core inflation (excluding all food and energy items) in the country has risen to about 6 percent as a result of a narrowingoutput gap and pass-through effects from higherenergy prices and exchange rate depreciation.

RBI has also voiced concern over inflation risks. In its recent Monetary Policy Report, RBI notes "inflation is expected to pick up from its current levels as the MSPs for kharif crops feed into domestic food inflation and favourable base effects dissipate. Volatile crude oil prices and the volatility in international financial markets pose the primary upside risks to the inflation outlook".

WEO has projected elevated level of current account deficit (CAD) up to 2023-24, the last year for which projections have been made. Immediate cause for worry is estimated CAD of 3% of GDP for 2018-19.

Before discussing policy response to emerging challenges, factor in another feedback.

According to a Quarterly Global Survey by McKinsey titled 'Economic Conditions Snapshot, September 2018', Respondents express declining optimism on the economy, especially in emerging markets. The United States gains more attention as a destination for new business opportunities.

The Survey points out that "In India, respondents now also cite the United States more often than their home country, which they identified most often in the past two surveys".

The challenge before the decision makers is to facilitate optimum blend of fiscal, monetary, foreign trade and other policy interventions. The urge to take short-sighted or electoral compulsions-driven steps should be eschewed.

The possibility of re-introducing export obligation on all importers should be considered to drive home the point that India can't live forever on foreign exchange that comes as FDI, multilateral soft loans and commercial credit.

The Government should unleash all forces to facilitate robust, competitive generation of export surpluses. This brings us to the need for timeline-driven roadmap for product and labour market reforms. These are the key to improving competitiveness of Indian economy. The Government should work tirelessly to make India favourite destination both for ‘Make In India Exports' and for foreign direct investment (FDI).