Strict monitoring of reforms needed to contain CAD
Though exports rose a smart 12% in July while imports remained flat—once you strip out oil and gold imports, they rose just 0.3% yoy—it is too early to say whether India is on track to achieve the $70 billion FY14 current account deficit finance minister P Chidambaram spoke of yesterday. While speaking of a $75.5 billion business-as-usual deficit—most analysts were predicting an $85 billion number—the finance minister said compression of oil and gold imports could help save around $5.5 billion. Given the $11 billion or so of fresh capital-raising he spoke of—$4 billion of PSU bonds, $4 billion of greater PSU trade credit, $2 billion more of ECBs for the private sector and $1 billion more of NRI funds now that interest rates have been deregulated—this suggests the CAD can be fully financed. How the rupee behaves over the next few days will tell us whether the market believes the FM’s maths. If the PSUs are able to raise the necessary funds within a few weeks, certainly the market mood could change.
What the FM’s maths requires, in a sense, is the perfect calm—the opposite of the perfect storm—where everything works out harmoniously. While consumption of kerosene, for instance, has already fallen 18% in the first quarter with the government going slow on allocations and, thanks to a hike in prices, diesel consumption has remained flat while LPG has fallen 4%—all told, the FM expects $1.5 billion lower oil imports this year due to such measures. Greater rupee payments for Iranian oil will also help. Given how FIIs have pulled out $4.3 billion since April 1, it is just as well the FM has not budgeted for any FII inflows for the year. More so, since, with June IIP contracting 2.2% on top of a negative number a year ago, even the base effect didn’t help—more earning downgrades are expected. A poor IIP was expected given commercial vehicle sales have contracted each month since the beginning of the year, save in April when they registered a positive 0.75%. More worrying, while consumer goods contracted for the second month in a row, durables contracted for the seventh consecutive month. FMCG volumes, for HUL for instance, grew 4% in Q1 as compared to the 10-quarter average of 9.1%. Given the rupee has weakened even more after RBI’s third set of tightening since July 15, the government needs to seriously look at whether India is in danger of slipping into a vicious low-growth spiral.
While the state of the economy will influence FDI decisions, whether FDI inflows of $22 billion—$6.7 billion has come in during the first 4 months of the year—will come in also depends on the pace at which reforms are pushed. Since MROs have now been categorised as infrastructure, if more aviation deals of the Jet-Etihad type materialise, we can expect more aviation FDI. Indeed, the FM said he expected more FDI in areas like aviation and pharmaceuticals—commerce minister Anand Sharma, the FM said, would soon meet the prime minister and a decision would get taken on clearing FDI in pharma. Among various pending pharma proposals before the FIPB is a $1.6 billion Mylan takeover of Strides Arcolab’s injectables unit. There are several other low-hanging fruit as well—several oil firms like Cairn and RIL-BP have projects stuck; FE reported Monday on Cairn approaching the Cabinet secretariat on a R5,000 crore integrated block development project that is an integral part of a R13,000 crore investment over the next three years. The FM has made his intentions clear. Now to deliver on them.