The recent events have proved beyond doubt that the Indian economy is no longer decoupled from what is happening outside.
The sudden drop in rupee value of dollar due to the large outflow of FIIs has taken place on account of the enhanced perception of probable stoppage of quantitative easing (QE) by the US sometime in early 2014.
The diminishing scale of stimulus measures would imply restricted liquidity in the country, a rise in interest rate, which has prompted FIIs engaged in other emerging countries to come back. The immediate response of foreign capital to flee does not happen with FDIs and therefore, the slow growth of FDIs in the past few months in India should reactivate the government?s efforts to facilitate more FDIs by initiating more reforms in critical sectors.
A large part of the envisaged investment for the infrastructure sector in India would also depend on the level of FDIs in each sector that would partially take care of the component of private investment.
The strings pulled by US Federal Reserve have led to a sharp decline in currency value in Turkey, Brazil, South Africa and Mexico in addition to India. The damages inflicted on the economic management of the country would have been vicious, but for the existence of a below-comfortable foreign exchange reserve. The lessons learnt in the past few months are enormous and should help the government in expediting sectoral reforms and fiscal consolidation.
The RBI has come out with its assessment of the Current Account Deficit for Q4 of FY13 and for the full year. The alarming rate of CAD reaching 6.7% of GDP by end of Q3 gave an early signal of depleting foreign exchange reserve in the face of a declining economic growth at 5%.
There seems to be a marginal reprieve with CAD touching 3.6% of GDP in Q4 and 4.8% for the FY13. While POL import outflow have gone up by 9.2%, the outflow a/c gold import has fallen by 4.8%.
The growth of non-oil, non-gold import outflow lower by 3.1% as compared to the previous year indicates a slower rate of industrial growth. The story of steel imports is, however, different.
In 2012-13, the total steel and steel-related imports in volume has gone up by 19% compared to last year. Even assuming a fall in global steel prices in FY13, the total value of steel imports must exhibit a rise.
The net deficit of total steel trade as per the official data amounts to Rs 29,790 crore, which approximates 0.27% of GDP. The higher level of steel imports has not led to higher rate of growth of steel consumption that has risen by a meagre 3.3% against 6.8% in the previous year. It also strengthens the apprehensions of the domestic steel industry that cheaper imports are substituting domestic production without supplementing the supply sources by enhancing consumption.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal