Drop in CAD shows effectiveness of monetary, fiscal policies

Written by Sushim Banerjee | Sushim Banerjee | Updated: Mar 11 2014, 09:34am hrs
A significant drop in CAD from 6.5 % of GDP in Q3 of FY13 to 0.9% in Q3 of FY14 indicates the effectiveness of the fiscal and monetary policies of the government.

Quantitative measures to control gold imports have paid as import value for the precious metal has come down from $16.5 billion in Q1 of FY14 to $3.1 billion in Q3. Interestingly, compared with goods import of $124.4 billion in Q1, the import outgo has fallen by 9.2%, but the export earnings have gone up 7.9% and export proceeds are lower than the values earned in Q2.

The FM has taken the credit of containing deficit below the target. But lower CAD in Q3 has been accompanied by lower GDP growth of 4.7% compared with 4.8% in Q2. Lower CAD, however, has put a brake on the upward movement of inflation, which currently stands at 5.05%.

Lowering of non-essential imports especially under a scenario of drying up of resources is laudable. Unfortunately, in a developing economy, the containment of import intensive products leads to temporary job losses for which no alternative can be immediately made available. The government had announced a cut in the spending in Q3 and Q4 to contain expenditure and improve deficit position. The advance estimates for macro-economic indicators in Q3 reveal the worrisome aspect of declining gross fixed capital formation as a percentage of GDP from 28.6% in Q1 to 27% in Q3.

Value added to the manufacturing sector has been further hit to reach a negative growth of 1.9% in Q3 with growth rate in construction sector dropping from 4.3% in Q2 to 0.6% in Q3. The maximum value addition has taken place in financing, insurance, real estate and business services sectors and also in community, social and personal service sectors. The present composition of GDP is gradually becoming heavily oriented towards tertiary sector and is biased against the commodity sector. The government has, by and large, satisfied the latest IMF prescription of containing inflation and CAD as the major risks facing Indian economy, but has fallen short of the target of internal reforms, improvement of supply bottlenecks in power and infrastructure to make up for lack of investment.

Currently the market scenario is not giving hope to the prospective investor that output flows after the installation would enable him to recoup the expenditure and earn surplus. There is a definite need to dispel the distrust of investors. Reining inflation and CAD are difficult challenges to win, but a feel-good factor requires a more holistic approach of economic management. Commodity sector must experience a good growth, before Indias GDP threatens to fall in line with the Hindu growth rate.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal