|Wednesday, 04 December 2013 00:00|
Indian Express editorial
Till there is more coherent policy-making, data will flash red and green at the same time.
Given the remarkably better current account deficit (CAD) — $5.2 billion in Q2FY14 versus $21.8 bn in Q1FY14 and $18 bn, $32.9 bn and $21 bn in the preceding three quarters — it is not surprising the finance minister cited this as yet another sign that the economy was turning around. With the CAD for the first half of the year at $27 bn versus $38 bn in the same period of FY13, the full year's CAD is now on track to be around $50 bn, or 2.7 per cent of the GDP, a remarkable compression compared to last year's 4.8 per cent. The US taper, likely around March or April next year, will once again result in FII money moving out. But, apart from the much lower CAD, the $34 bn the RBI managed to get in so adroitly through its swap window — keeping oil company demand out of the forex market, and then reintroducing it, was another smart move — will ensure India is much better prepared this time.
Though it is true the $16.6 bn reduction in the CAD this quarter largely comprised a sharp $12.7 bn compression in gold imports, there is a slight improvement in non-oil non-gold imports. These are up from $66 bn in Q1FY14 to $69.8 bn in Q2FY14, suggesting a slight pick up in domestic demand, a point reflected in the GDP data as well. The latest Purchasing Managers Index (PMI) data for November reinforces this. For the first time after three straight months of contraction, the PMI was at 51.3 — a number above 50 indicates an expansion. Analysis of sub-indices of the PMI suggests that, since prices of inputs are falling faster than the prices of finished products, margins of manufacturing firms are likely to look better in the months ahead.
Yet, look at other data, on project starts or on sales of commercial vehicles (CVs) — CV sales contracted 16 per cent in April to October over the same period last year — or even credit growth, and it suggests an economy not yet bottomed out. There is an explanation for the apparent contradiction. Since the economic pulse is weak, big-ticket spending on new projects is certain to be weak. That is not going to pick up till, arguably, there is clarity on the next government, its stability and economic policies. India Inc, similarly, needs to clean up its balance sheets before meaningful investments can take place. Even the CAD that looks under control right now remains structurally flawed, with high imports of coal and scrap iron — and low exports of steel — certain to rise once the GDP starts rising. This cannot be fixed till mining bans are lifted or, for instance, the coal sector is opened up. In other words, a low-level equilibrium is where we're at.