Collapse in gold imports is the only silver lining
Given how the government made reduction in gold imports a big priority, it has reason to be happy about the collapse in June gold imports. The problem, however, is that overall imports are now at a level last seen in March 2011, suggesting a very poor economic situation. Were the collapsing imports being substituted by more local supplies, that would be fine, this would be the classic J-curve impact of a falling rupee—imports fall off first while exports take a bit of time to respond. That, however, isn’t happening since the industrial production numbers for May have contracted by 1.6%. All told, while imports have collapsed, so have exports, taking the cumulative first quarter FY14 trade deficit to over $50 billion, making financing the CAD a serious problem, more so since FII flows continue to be negative. Which is why, even if temporarily, the return of global risk-on hasn’t really helped the rupee regain much of its lost value—the small gain is a result of RBI intervention and curbs put on traders, a losing game given the size of the overseas NDF market in rupees that the government has no powers to control. On a quarterly basis, Q1 exports were $72.5 billion, down $11 billion from the previous quarter and $1 billion from the same quarter last year. Given the fall in market share in areas like even textiles, an uncompetitive Indian industry is losing out on the opportunity created by Chinese wages rising and its currency appreciating.
The April IIP, it is true, was exaggerated because of an inexplicable 87% surge in apparel production—once you fix for this, IIP grew just 0.4% as opposed to the numberplate 1.9%—but the May contraction comes as a real shocker. Even though there were enough indicators flashing red a few months ago, only twice before in the last 3 years have consumer goods sales contracted—the 4% contraction in May was the most severe. Medium- and heavy-commercial vehicles, a lead indicator of industrial activity, have been in contraction mode since October 2012 but, at 10.6%, the June fall has been the highest. Even passenger vehicles have been contracting since December 2012 though, at 4.8%, the intensity of the June fall has been lower than in the past. The fact that June 2012 IIP contracted will, though, help make June 2013 IIP look a bit healthier.
In such a situation, a rate cut is seen as the ideal solution but what complicates things is that high interest rates are important to attract foreign debt flows so vital for the rupee. In any case, while lower EMIs can stimulate demand, any recovery to even a 6% growth is going to be a tough haul. Until growth picks up and there are more jobs on the horizon, consumption growth can’t really pick up, and even if the government clears various investment bottlenecks, India Inc is too leveraged to finance new projects. The government’s best hope, under the circumstances, is to focus on projects that can quickly get off the ground—the DMICDC projects come to mind immediately, as do the pending FDI proposals to buy existing Indian pharma firms as well as clearances for oil firms that are even more anxious to invest now that gas prices have been raised. As the HUL and Diageo open offers show, foreign interest in India remains alive.