Column: What has changed since Sept

Written by Soumya Kanti Ghosh | Updated: Jan 15 2013, 08:39am hrs
A raft of reforms has lifted market sentiment, stabilised the rupee and curbed imported inflation

September 2012 could be defined as the watershed month in the current fiscal. The government announced a series of reforms to pull back the economy from the brink and, till date, such an endeavour is well and truly on. In between, a raft of macro numbers have been released, and it seems that we may have just seen off the worst.

Let us start with the immediate impact of the measures announced by the government. There has been indeed an improvement in investor sentiment since September. Portfolio inflows during September-December 2012 aggregated close to $14 billion, which is slightly lower than $17 billion that flowed into India during the entire FY12! Such a huge rebound in capital inflows had a significant influence on the rupee value that pulled back from R57/$ to the current R54.5/$.

What is the impact of such rupee appreciation First, the sobering impact on the oil import bill. Our estimates suggest that every one rupee appreciation in rupee value trims the oil import bill by 2%, all other things remaining unchanged. Interestingly, the rupee has depreciated from an average of R49/$ in FY12 to around R54.5/$ currently, a depreciation by roughly R5.5. Contrast this with the oil import bill that has climbed by 11% in the first eight months of current fiscal. Clearly, the increase in oil import bill has been mostly because of the rupee depreciation in the earlier part of FY13, and the current appreciating trend will mitigate the oil import bill to a significant extent. This could have a sobering impact on Indias current account deficit (CAD) that touched 5.4% of GDP in Q2FY13.

Second, the trends in imported inflation rates are important. Imported inflation that had touched 8.4% in September 2012 has now declined to 6.5% in November 2012. This will give RBI the much needed flexibility to look for a rate cut going forward.

Third, as per CMIE data, the number of stalled/shelved projects have come down marginally in the quarter ending December 2012. The number of stalled/shelved projects was 98 in quarter ending December 2012 (the corresponding figure last year was 173). What is also encouraging is that there has been a depletion of cash balances and inventory held by the manufacturing sector for the quarter ended September 2012.

We now turn to the fiscal position of the government, since many believe that this is one area that the government needs to work on, notwithstanding the announcement of fiscal roadmap. It may be noted that the finance ministry has recently proposed a roadmap for fiscal consolidation. The envisaged deficit in the plan reveals the enormity of the task, with the government proposing to bring down the deficit to 4.2% over FY15. Interestingly, this target is higher than Kelkar recommendations (3.9%). It may be noted that the government is already projecting a slippage in fiscal deficit in the current fiscal to 5.3% of GDP from the budgeted 5.1%.

However, the deficit figures during April-November 2012 reveal some interesting trends. As graph 1 shows, while non-plan expenditure grew at 16%, helped by a 17% growth in non-plan revenue expenditure (this remains the biggest risk on fiscal consolidation, because of subsidies and interest payments), plan expenditure grew at 10%, helped by a 33% increase in capital expenditure. This increase in capital expenditure is readily welcome, as it will provide the much needed support for crowding in private expenditure. Equally heartening is the government endeavour not to enlarge the size of government borrowings, as this could have sent out wrong signals to the markets (the 10-year yield has rallied significantly in the last couple of days to touch 8.15%).

Total receipts also grew at 12% (see graph 2), surprisingly helped by a 15% growth in net tax revenue (though helped by a lower base). However, the growth in receipts were pulled down by a de-growth in disinvestment receipts, and a near-flat growth in non-tax revenue. Clearly, the government needs to go for a disinvestment bash and perhaps another round of spectrum sales in the last quarter of the current fiscal to bolster its receipts.

One small caveat here. The compression in plan expenditure, if we go by the data for the ministries, is more for agriculture, consumer affairs, education, social justice, textiles, etc. Also, the rural development ministry that administers the MGNREGA programme has seen only marginal increase in year-on-year growth.

Amidst all this, one bad news is the continuous decline in exports in current fiscal by close to 6% (April-November 2012). We need to fix this sooner; else we may be staring at a CAD that could be difficult to manage!

Finally, the efforts by the US administration to reach a consensus on fiscal cliff was the highlight of 2012. Simultaneously, the US headline non-farm payroll (NFP) employment in December came at better than market expectations. Not surprisingly, the stock markets greeted the news with optimism.

All indications thus suggest that 2013 could just be the beginning of turning around the corner. However, for that to happen, we need to march forward in the same vein as we have done in the last couple of months. Good luck.

The author is director, economics & research, Ficci. Views are personal