REPORT

Is India growth story in doledrums ?

Ficci underlines slowdown fears

By Ravi Shanker Kapoor

In its recently released September report, ‘Economy Watch,’ the Federation of Indian Chambers of Commerce & Industry (Ficci) has once again underscored the impending slowdown. Regrettably, as we shall see, it is not the first or only observation about the sorry state of the economy.

“The state of Government finances worsened with the fiscal deficit in the first five months of the current fiscal constituting over 66 per cent of the budgeted fiscal deficit. This is much higher than in previous years and ensures that the fiscal deficit target will be breached. Total revenue collections during the same period were at a measly 23.5 per cent (vis-à-vis 40.7 per cent previous year) of the budget estimates,” the Ficci report said.

Indirect collections in September showed ominous signs, with excise duty declining by over eight per cent.

Against this backdrop, it is not surprising that the Prime Minister’s Economic Advisory Council (PMEAC) has once again downwardly revised growth forecast for the current fiscal to eight per cent from its earlier forecast of 8.2 per cent (July); in February, it had project an even higher nine per cent growth.

Ficci, however, finds even the eight per cent growth rate to be ambitious. Its rationale: for eight per cent expansion, gross domestic product or GDP “has to grow at 8.1 per cent in the remaining course of the current fiscal, an unlikely scenario. It may be noted that real GDP growth rate for Q1 of 2011-12 has been 7.7 per cent (on the back of base effect).”

The business chamber’s bearishness arises from, among other factors, its own latest Business Confidence Index that is now at a two-year low. “The growth in service sector is also expected to be lower than 10 per cent, given that there is a clear slowdown in public expenditure on community, social and personal services (and also supported by the latest HSBC Purchasing Managers Index (PMI) for Sep’11 has contracted for the first time since April 2009). Also, the industrial sector and global economic slowdown will adversely affect ITES and other service sectors.”

The global economy hardly gives any reason to rejoice. “Stream of bad news” continues to “emanate from the Euro Area… Europe is clearly caught between the devil and the deep sea,” says the Ficci report.

Perhaps the only pleasant surprise relates the country’s export growth which, the report says, “continues to surprise even die-hard optimists.” India’s merchandise exports stood at $108.3 billion during Apr-July, 54 per cent higher than that in the corresponding period in previous fiscal. “India’s gems and jewellery exports (with a 15 per cent share) witnessed a robust growth of 26 per cent during FY11 and provide a classic example of our successful export growth story. It may be noted that the recent turbulence in US and European economies may have dampened the export prospects of gems and jewellery to these markets but the diversification in exports to other countries like UAE, North Africa, CIS and Russia may counterbalance the slowdown impact.”

But everything is not hunky-dory about foreign trade. Governance deficit has created a situation which can scarcely be called healthy. The lack of proper policy framework has introduced distortions in the foreign trade agreements (FTAs). “The high real estate cost, unavailability of skilled manpower and high transaction costs are the key barriers in creating a viable domestic production network,” says the Ficci report.

So, “the ‘Round trip of Trading Activities’ has become increasingly evident through FTAs where the Indian firms export raw materials and bring back the intermediate/final products as import items from partner countries. This phenomenon is particularly prevalent when the firms decide to offshore parts of their production process and source the intermediates from the partner country.”

In sync with the demands of India Inc, Ficci also urges the Reserve Bank of India not to further tighten monetary policy. “We believe that the RBI’s resolve to fight inflation is commendable, particularly as this is being done without any support from fiscal policy. However, the central bank may do better by looking at other policy options. For example, the RBI could tweak the risk-weights, rather than concentrate only on rate hikes.”

There seems to be considerable consensus among industry and bankers that the central bank has done enough to squeeze the money supply. At a banking conference on October 11, bankers said opposed any more rate hikes. They said that arguing that early signs of a slowdown are becoming increasingly evident. Further, they said, more hikes would hurt long-term investment demand. The RBI, it may be recalled, hiked key bank rates 12 times in the past 18 months.

Be it Ficci or any other business body or forum, the message they are conveying is simple: this is not the best of times for the economy. But is anybody listening? The ruling United Progressive Alliance certainly is not.