Plug Chinks in Growth Caravan before aiming at USD 5 Trillion Goal
JULY 25, 2019
By TIOL Edit Team
CHINKS in India's growth momentum are a cause for concern. This is the conclusion anyone would arrive at after reading series of latest reports from independent institutions both at home and abroad.
The major chinks pertain to Government's inability to attain & sustain robust increase in exports. This, in turn, has led to rise in trade deficit and current account deficit (CAD). Related to moderate rise in exports is the inability or reluctance to undertake holistic structural reforms that can help ramp up India's productivity of capital, labour and other assets.
The trade deficit increased to USD 103.63 billion in 2018-19 from USD 40.20 billion in 2016-17. Official data also shows that CAD, as a percentage of Gross Domestic Product (GDP) increased to 2.6% from 0.6% during the same period.
International Monetary Fund's (IMF's) External Sector Report (ESR) has thus ranked India is as third among the top 15 CAD countries after the United States and the United Kingdom. The top three counties with current surplus current account are Germany, Japan and Russia.
Released Last week, ESR says: "Based on India's historical cash flow and capital inflow restrictions, global financial markets cannot be counted on to reliably finance a CA deficit above 3 percent of GDP".
It continues: "FDI flows are not yet sufficient to cover protracted and large CA deficits; portfolio flows are volatile and susceptible to changes in global risk appetite, as demonstrated in the taper tantrum episode and again in fall 2018. Based on the (IMF) staff-assessed CA norm, the CA is in line with fundamentals and desired policies, with a CA gap range from -1.0 to 1.0 percent of GDP. Positive policy contributions to the CA gap stem from a negative credit gap and a relatively closed capital account, partly offset by a larger-than-desirable domestic fiscal deficit and a large decline in FX (foreign exchange) reserves".
Reserve Bank of India (RBI) has voiced similar concern on exports & CAD in its Financial Stability Report (FSR) released on 27th June.
As put by FSR, "Domestic economy hit a soft patch in the last quarter of 2018-19 as private consumption, the key driver of GDP, turned weak. This along with subdued new investment pipeline and a widening current account deficit have exerted pressure on the fiscal front. This has implications for the government's market borrowing programme and market interest rates. Reviving private investment demand remains a key challenge going forward while being vigilant about the spillover from global financial markets".
We hope Prime Minister's Office, NITI Aayog and Finance Ministry take positively such negative feedback from different quarters.
Finance Ministry's annual Pre-Budget Economic Survey (ES) released last month has also taken note of export challenges in achieving the goal of USD five trillion economy in 2014-15. To achieve this goal, inflation has to be contained at 4% and GDP register real 8% growth per annum.
The export growth required to deliver the 8% real GDP growth rate may require a depreciation of the real effective exchange rate. ES has, however, pitched for export growth through increases in productivity rather than currency depreciation.
Depreciation is mixed bag that brings in both inflation & growth. According to Export-Import Bank of India, "A depreciation of the Indian rupee by around 5% relative to the baseline could increase inflation by around 20 bps, while providing a boost of 15 bps to growth."
ESR has concluded that India's annual capital inflows are relatively small. It says: "Given the modest scale of FDI, flows of portfolio and other investments are critical to finance the CA. As evidenced by the episodes of external pressures, portfolio debt flows have been volatile, and the exchange rate has been sensitive to these flows and changes in global risk aversion. Attracting more stable sources of financing is needed to reduce vulnerabilities".
ESR's recommendations are: "Ease domestic supply bottlenecks and revamp business climate, improve competitiveness and investment prospects, to attract FDI and boost exports". It has also suggested gradual liberalization of portfolio flows.
These and ideas from other quarters including Economic Advisory Council to the Prime Minister (EAC-PM) should be taken seriously against the backdrop of reduction in GDP growth projections.
IMF in its update on World Economic Outlook (WEO) has projected India's GDP growth at 7% in 2019 and 7.2% in 2020. As put by update, "The downward revision of 0.3 percentage point for both years reflects a weaker-than-expected outlook for domestic demand".
We hope the Government would balance political exuberance over branding India as world's fastest growing economy and fundamental limitations for sustained, good-quality growth. It is time to lay road-map for shift from Imports-led growth to export-led growth with modest current account surplus.