by admin | May 25, 2021 | Opinions
By Amit Kapoor & Chirag Yadav,
In a massive relief to Indian exporters, the government announced liberal incentives of Rs 8,450 crore ($1.3 billion) in its mid-term review of the five-year foreign trade policy (FTP) that was rolled out in 2015 and aimed at increasing the export of goods and services to $900 billion by 2020. Exports, meanwhile, declined from $468 billion to $437 billion between 2014-15 and 2016-17.
In fact, India’s external trade performance has grown to be so acute that the current account deficit in the first quarter of the current fiscal year reached a four-year high of 2.6 percent.
What is more worrisome is that this trend is continuing despite favourable trade conditions in the global markets. Only domestic factors can explain the widening trade deficit. Clearly, the uncertainty surrounding the implementation of the Goods and Services tax (GST) has had a major role to play. Data due this month will show whether the situation has improved in the second quarter.
However, the chances of any significant improvement remain bleak as issues in processing of refunds to exporters under GST has been affecting trading activities. Therefore, the sops given in the mid-term review should help in pumping up exports to an extent.
Basically, labour-intensive sectors under the Merchandise Exports from India Scheme and Services Export from India Scheme, which were introduced in the FTP, were given an incentive raise of two percent each. Under the scheme, exporters are granted credit scrips based on the said percentage of the total value of their exports. These scrips can be used for payment of duties on procurement of further inputs. Additional incentives of two percent are expected to boost the subdued export activity of the last few quarters.
However, even though such an incentive was crucial in the short run given the circumstances, it always remains pertinent to ask if we are doing enough. After all, no country in history has sustained a growth rate of seven per cent without an export growth of 15 per cent or more and, according to World Bank data, Indian export growth of goods and services has not even crossed 10 per cent since 2011. Therefore, there seem to be larger structural issues at work that are impeding the growth of India’s external sector.
In order to further reinforce this fact, we can look into the long-term trends of India’s leading export sectors — gems and jewellery, leather and textile. It is quite disconcerting to realise that India’s comparative advantage in all of these sectors is nowhere close to that at the turn of the century. Moreover, all of these sectors are highly labour-intensive and losing comparative advantage in them is quite inimical to the economy’s employment-generating capacity.
A common argument made to improve India’s trade competitiveness is that the rupee is strong and needs to be depreciated to make exports competitive in the world markets. However, this argument falls flat in the face of recent trends in both the exchange rate and the real effective exchange rate over the last few months. Both of these indices have remained stable in the last fiscal and, in fact, fell slightly in August while exports continued to show a downward trend. There was not much strength in the argument anyway, since export competitiveness is not defined by currency but by productivity of the workforce.
Indian policymakers need to recognise that the trade challenge for India is structural in nature and cannot be done away with quick-fix solutions. Cost incentives are an acceptable approach to deal with immediate challenges like the impact of GST, but they need to be supplemented with more long-term solutions. An effective measure could be to identify sectors where India has a comparative advantage and work towards making it competitive.
This implies helping them with action research for market development and providing R&D support. Such an approach will allow producers to innovate and beget productivity gains. Second, India’s poor logistical network is also a factor of concern. Since India is over-dependent on its road networks, the logistics cost as a percentage of GDP amount to almost 13-14 per cent as compared to 7-8 per cent in developed countries.
Third, India’s trade agreements with other nations are largely deficient in nature. The country’s top exports face tariff and non-tariff barriers in developing economies and various kinds of non-tariff barriers in developed ones. Moreover, most of its free trade and preferential trade agreements are ill-conceived in nature.
The India-Japan CEPA is a case in point. India has failed to make any gains out of it simply because it is too cumbersome. For instance, Japan allows duty-free import of Indian apparels only if the sourcing of raw materials is done from either of the two countries with an exception of seven per cent content by weight that can be sourced from a third country. The South Asian Free Trade Agreement, which was signed for geo-political reasons rather than commercial ones, is another example.
Multiple issues ail the export sector of the Indian economy, a lot of which go beyond the scope of the FTP. The government should now delve into these structural aspects of trade policy before India loses any more of its comparative advantage to world markets. Now that China is slowly losing its status as the world’s manufacturing hub, the time has never been so ripe.
(Amit Kapoor is chair, Institute for Competitiveness, India. The views expressed are personal. He can be contacted at amit.kapoor@competitiveness.in and tweets @kautiliya. Chirag Yadav is senior researcher, Institute for Competitiveness)
—IANS
by admin | May 25, 2021 | Economy, Markets, News
Mumbai : Bargain hunting by investors after previous two session’s losses lifted the key Indian equity indices on Thursday, with the BSE Sensex gaining over 300 points and the NSE Nifty50 closing firmly above the 10,100 level.
According to market observers, robust buying in auto, consumer durables and capital goods stocks lifted the benchmark indices.
On a closing basis, the wider Nifty50 of the National Stock Exchange (NSE) edged higher by 122.60 points or 1.22 per cent to 10,166.70 points.
The barometer 30-scrip Sensitive Index (Sensex) of the BSE closed at 32,949.21 points — up 352.03 points or 1.08 per cent — from its previous close.
The BSE market breadth was bullish — 1,860 advances and 818 declines.
“Markets bounced back strongly on Thursday after the sell-off seen in the previous session. Investors seemed to be bargain buying after the recent fall. A sharp fall in oil prices in global commodities market yesterday (Wesdnesday) also boosted market sentiments,” Deepak Jasani, Head, Retail Research, HDFC Securities, told IANS.
“Technically, while the Nifty has bounced back smartly, the underlying trend remained down. The Nifty would need to cross the previous intermediate high of 10,410 to reverse the current downtrend,” he added.
In the broader markets, the S&P BSE mid-cap index closed higher by 1.38 per cent and the small-cap index by 1.29 per cent.
Vinod Nair, Head of Research, Geojit Financial Services, said: “Market smartly recouped from the yesterday’s losses which were triggered by Reserve Bank of India’s (RBI) hawkish policy and weakness in global market. However, RBI reiterating an economic growth of 6.7 per cent for FY18 uplifted the sentiment.
“Upcoming state election in Gujarat and rupee movement against dollar ahead of US tax reform will be keenly watched for further momentum in the market.”
On the currency front, the rupee weakened by 4-5 paise at 64.57-56 against the US dollar from its previous close at 64.52.
All the 19 sub-indices of the BSE ended in the positive territory, led by the S&P BSE consumer durables index, which augmented by 523.55 points, followed by auto index by 488.19 points and capital goods index by 378.66 points.
Major Sensex gainers on Thursday were: Bharti Airtel, up 6.08 per cent at Rs 513.35; Asian Paints, up 3.29 per cent at Rs 1,140.50; Maruti Suzuki, up 3.26 per cent at Rs 8,881.10; Tata Steel, up 2.97 per cent at Rs 687.90; and Bajaj Auto, up 2.78 per cent at Rs 3,195.
Major Sensex losers were: Coal India, down 0.64 per cent at Rs 263.30; Tata Consultancy Services, down 0.52 per cent at Rs 2617.65; Cipla, down 0.50 per cent at Rs 592.50; Wipro, down 0.34 per cent at Rs 281.35; and Sun Pharma, down 0.26 per cent at Rs 510.20.
—IANS
by admin | May 25, 2021 | Banking, Economy, Markets, News
Mumbai : In its penultimate monetary policy review of the fiscal, the Reserve Bank of India (RBI) on Wednesday maintained status quo on key lending rates citing concerns over the rising trajectory of inflation. It retained the economic growth projection for the current fiscal.
The central bank said its repurchase rate, or the short-term lending rate for commercial banks, had been maintained at 6 per cent.
Consequently, the reverse repo rate remained at 5.75 per cent.
The RBI said “two of the key factors determining the cost of living conditions and inflation expectations – food and fuel inflation – edged up in November.
“Accordingly, the MPC (Monetary Policy Committee) decided to keep the policy repo rate on hold,” the fifth bi-monthly monetary policy statement said.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent… while supporting growth,” it added.
Official data last month showed that India’s annual rate of inflation based on wholesale prices (wholesale price index) rose to 3.59 per cent in October due to an exponential rise in food prices.
In addition, the consumer price index (CPI), or retail, inflation for October rose to 3.58 per cent from 3.28 per cent in September.
The decision was taken by the six-member MPC headed by RBI Governor Urjit R. Patel. Five members of the panel voted in favour of maintaining the key lending rate.
At its two previous policy reviews, the central bank had kept its repo, or repurchase rate, unchanged at 6 per cent.
On the growth outlook, the RBI retained a real GVA (gross value added) growth, which includes taxes, for 2017-18 at 6.7 per cent, “with risks evenly balanced”.
On the positive side, the RBI said there there had been some pick up in credit growth in recent months.
“Recapitalisation of public sector banks may help improve credit flows further,” the policy statement said.
“In the MPC’s assessment, capital raised from the primary capital market has increased significantly after several years of sluggish activity. As the capital raised is deployed to set up new projects, it will add to demand in the short run and boost the growth potential of the economy over the medium-term,” it said.
At the media briefing following the announcement, RBI Governor Urjit Patel said he did not foresee any credit shortage that as demand grows and the economy picks up.
“Our latest data on bank credit shows we’re on the uptick on credit growth. There is more credit flowing in than at the time of our last policy review in October,” he said.
The Monetary Policy Committee also decided to continue with its neutral stance.
Elaborating on this, Patel said the macro data since October did not warrant a change in the RBI neutral outlook.
“Data flow will determine what we do on policy. All possibilities are open as we look at the inflation as well as growth data in the coming months.”
However, the RBI’s decision belied investors’ expectations.
The two key indices — S&P BSE Sensex and NSE Nifty50 — traded deep in the red just minutes after the RBI came out with its fifth monetary policy review.
The BSE Sensex dropped by almost 200 points while the wider NSE Nifty50 fell by over 70 points.
Nearing the close of trade on Wednesday, the wider Nifty50 of the National Stock Exchange (NSE) fell by 71.15 points or 0.70 per cent to trade at 10,047.10 points.
—IANS
by admin | May 25, 2021 | Opinions
By Peter Wooders & Vibhuti Garg,
With a rising population and fast-growing economy, energy demand in India is increasing rapidly. Is the country embarking upon a clean energy or a fossil fuel-dependent approach to meet this rising demand?
The energy path that the country will follow depends on the levers which the Indian government employs to shape its energy mix, including subsidies in the form of fiscal incentives, regulated energy prices and other forms of government support.
Following a recent comprehensive investigation into these policies, we find that central government energy subsidies were worth Rs 133,841 crore ($20.4 billion) in FY2016. In addition, through the UDAY scheme, state governments were provided a bail-out package for electricity distribution companies worth Rs 170,802 crore over a two-year period in FY16 and FY17.
The biggest subsidies by far still go to fossil fuels and the electricity transmission and distribution system, which is largely used by coal-fired power generation.
But trends are also changing: Renewable energy subsidies tripled in the past three years, while oil and gas subsidies fell by almost three quarters (in part due to policy changes and in part due to low oil prices), and coal subsidies remained largely stable.
This, of course, is the past and what matters is the future. Will these trends continue? And does it matter, anyway, if a clean or a dirty energy economy develops?
Well — in addition to representing a big share of taxpayer money — energy subsidies have wide ramifications beyond government budgets. One of the most important is public health.
The central government actually spends more on fossil fuel subsidies than it does on health: In FY16, it is estimated that for each $1 of government expenditure on health, $2.6 went to fossil fuel subsidies.
And yet, air pollution in Delhi and the northern states has been unbearable over the past weeks. Fossil fuels are one of the major causes of air pollution, particularly emissions from transport and coal-fired power plants. Recent estimates claim that outdoor air pollution caused more than a million premature deaths in India in 2016 and the OECD estimates that the economic cost of India’s air pollution is more than $800 billion.
These health impacts are also unfair. The worst-affected communities are usually those living around the points of fuel production and combustion, who have the fewest options to cope. A report by medical and public health experts of People First Collective India, for example, found serious health problems among residents living around coal mines and thermal power plants in the Tamnar block of Raigarh district, Chhattisgarh.
A study by HEAL estimates that fossil-fuel subsidy reform in combination with fuel taxation could help India prevent 65 per cent of premature deaths caused through air pollution, which in turn would bring down public expenditure on health and improve national productivity.
Energy subsidies also matter for achieving climate change targets. India’s Nationally Determined Contribution (NDC), solidified through the Paris Agreement on climate change, aims to cut emissions intensity by up to 35 per cent and increase the share of power sourced from low-carbon sources to at least 40 per cent of the total generation by 2022.
Furthermore, India’s leadership in establishing the International Solar Alliance (ISA), launched at the UN Climate Change Conference in Paris, is betting big on solar and a move away from fossil fuel towards renewables. Energy subsidy policies can make or break the success of these kinds of initiative, for good and bad.
There are, of course, no easy conclusions in a country as large and complicated as India. Some fossil fuel subsidies — such as for LPG cooking gas — help to improve public health by moving households away from biomass cooking fuel and so improving indoor air pollution. Some subsidies, particularly for electricity transmission and distribution, are much-needed to enable energy access.
Increased subsidies for renewable energy is not necessarily a good thing in and of itself. It is only worthwhile if India is getting good value for money and the subsidies encourage competition. Otherwise, they will just undermine the development of the renewable energy market. Subsidies are one policy tool and many others are required to make renewables a success.
These issues confirm the fact that we need better transparency on subsidies and better evaluations of which ones work and which ones don’t. Data on state-level subsidies remain poor, and changing policies — such as the introduction of the GST — requires ongoing reporting to update decision-makers and the public on what has changed.
China and Indonesia, India’s largest peers in Asia and fellow members of the G20, have already opted to prepare self-reports and peer reviews on fossil fuel subsidies. Yet more countries are expected to announce reviews in the coming months. And many others will be encouraged to start reporting fossil fuel subsidies under the Sustainable Development Goals (SDGs), a process where India is actively considering how to use and build upon its existing reporting mecahnisms.
Now is a good opportunity for India to provide leadership to others by conducting its own voluntary self-report, and peer review, to help cut through the smog obscuring energy subsidies, and promote a domestic energy policy that is aligned with other national objectives.
(Peter Wooders is Energy Group Director and Vibhuti Garg an Associate at the International Institute for Sustainable Development [IISD]. The views expressed are those of IISD. They can be contacted at vibhuti.garg@iisd.org)
—IANS
by admin | May 25, 2021 | Opinions
By Amit Kapoor,
The much-awaited second quarter gross domestic product (GDP) figures were released last week. It must have come as a relief to the Modi government that economic growth is finally on the upswing. After five successive quarters of decline, growth inched up to 6.3 percent in the July-September quarter after hitting rock bottom at 5.7 percent in the previous quarter. There was a mild sentiment of euphoria over this turnaround, but it is instructive to point out that even the worst quarter after the 2008 recession took India to a low of 6.9 percent. Clearly, we’ve left the last decade far behind.
Some might say that the comparison is unfair since the global economy was conducive to such levels of growth at the time. However, the impact of domestic factors in the growth decline over the previous five quarters cannot be refuted as OECD estimates put global growth to be the fastest since 2011. Also, demonetisation and GST were not the only two culprits of the slowdown in growth since it had begun much earlier. Private investment sentiments had already been muted due to a rising stock of bad loans.
Nevertheless, the adverse impact of all these factors seem to be nearing their end. A rise in GDP growth rate points to the fact that the impact of demonetisation and GST is finally wearing off and the government has over the last few months taken some crucial steps to deal with the problem of bad loans. But are we out of the woods yet?
The data released last week does not paint a promising picture. First, the growth rebound was brought about largely on account of the manufacturing sector. It grew by seven percent as compared to a paltry 1.2 percent during the April-June quarter. However, curiously, this figure is much higher than the 2.2 percent year-on-year growth in the same quarter based on the index of industrial production (IIP) data. The gap can only be explained by differences in methodology.
The IIP measures the change in production volumes as compared to the previous year while the GDP calculation measures the value addition taking place in the economy. Therefore, if production volumes remain the same over the year, IIP data will show no growth, but in the same scenario, if the price of inputs fall, GDP will grow positively. This is exactly how the recent growth in manufacturing has come about. Production volumes have not expanded as commensurately as production value. This is not a positive sign for a developing economy like India, where demand for jobs is ever expanding. Growth will not matter much if real production does not take place.
Second, a factor of growing concern for the economy is the problem of the fiscal deficit. The day GDP figures came out, stock markets reacted negatively due to the slippage on the fiscal front. Private investments have not seen any substantial revival since the last quarter and, in fact, gross fixed capital formation as a percentage of GDP has actually declined. The only thing keeping the economy running was increased government spending, but even that has been stretched beyond its limits. Barely more than half a year has passed, and the government has already spent 96 percent of its annual target. Since the government has made clear its intentions of sticking to the fiscal target, future growth prospects do not look promising and will solely depend on a revival of private sentiments.
Finally, a big worry for the Indian economy is its underperforming export sector. The growth in exports took place at merely 1.2 percent in the last quarter, which is hard to explain at a time when the global economies are at one of their strongest phases of growth in a long time. It is absolutely crucial to address this issue because, as repeatedly pointed out by veteran economic journalist Swaminathan S. Anklesaria Aiyar, no country in history has managed to grow at seven percent on a sustained basis without an export growth of at least 15 percent. India’s subdued export performance is puzzling and it needs to figure out what is inhibiting its growth. The recently-implemented GST framework could have put a spoke in the wheel. Addressing these policy bottlenecks can bring exports to an upward growth path.
All these factors, combined with the fact that private investment continues to remain weak, point to bleak prospects for the Indian economy. This will remain true for the next few quarters. Hopefully, when the complete impact of the recent string of reforms with GST, Real Estate Act and Bankruptcy Code start to kick in, a revival in private sentiments will take place and drive manufacturing and exports in the process. Until then the only ray of hope resides with the favourable external sector as a lucrative source of demand.
(Amit Kapoor is chair, Institute for Competitiveness, India. He can be contacted at amit.kapoor@competitiveness.in . Chirag Yadav, senior researcher, Institute for Competitiveness, India, has contributed to the article.)
—IANS
