If positive growth is limited only to US, it could be more bad news for us

Written by Sushim Banerjee | Sushim Banerjee | Updated: Aug 31 2013, 15:04pm hrs
The finance minister has cautioned against being too pessimistic on the current economic scenario of the country. The sliding rupee, the steep fall in industrial output, particularly in manufacturing, the hesitancy in commencement of mega projects in the midst of a plethora of assurances to clear the logjam leading to a bleak investment status, all tend to pull down the spirit.

It is the unflagging faith in the fundamental strength of Indian financial system with CAD still away from what can be called as alarming with a reasonable FE reserve to cover five and half to six months imports may prevent us from degenerating into that mental state.

There are, however, a few perplexing issues which have a long-term implication.

All along it was widely perceived that growth in US economy was good for India as it improves our export prospects (textile, software and engineering).

It also brings down the protectionist steps pursued by the US commerce department against imports from emerging and developing countries.

The recent events on the contrary generated an apprehension that any slackening of the Quantitative Easing following the gradual withdrawal of the stimulus measures by Federal Reserve (reflected in slowing down of bond purchase worth of $85 billion each month) would make FIIs flow out of emerging countries to America to fill up the dollar shortage due to rising interest rate.

This is the primary reason for massive depreciation of rupee and a few other currencies in the world vis--vis dollar and points out the fragile nature of the share market that is dependent on the volatile FIIs and the missed chances of attracting more FDIs. Thus, if positive growth occurs only in US economy, the single destination of FIIs, it is likely to cause further damages in India.

Fortunately, there is an early signal of recovery in Europe. The latest PMI at 51.7 is significantly above 50.5 indices of the previous month and Germany, the strongest partner is back on growth path.

Similar return to normalcy is also reported in China, the biggest manufacturing hub and positive demand from US and Europe is certain to lift the sagging prices of engineering goods in the global market. Japan has clocked a 0.9 % growth in GDP in Q2, CAD at (+) $54.1 billion in June 2013.

The reversal of negative growth in the major consumption points holds better prospects for Indian exports.

The latest pressure put in by miners lobby and their associates to relax export curbs on iron ore is another temporary reprieve suggested with adverse long term implication of depletion of irreplaceable natural resources. We should learn from the Chinese treatment of its natural resources which has nearly eliminated exports of precious mineral reserve.

The utilization of fines through beneficiation and pelletisation (agglomeration) plants set up with considerable investment by the major steel producers, albeit much delayed, must be rewarded.

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