The Indian economy stands at a crossroad. A few long-pending initiatives taken by the government in September had raised the level of expectation to a high.
While the outcome is rightly considered to be taking some time to produce results, the drop in GDP from 5.5 per cent in Q1 of FY13 to 5.3 per cent in Q2, lowering of IIP to (-) 0.1 per cent in November, reduction in the manufacturing sector's growth in the first 8 months (1.0 per cent) and a rising CAD has impacted the confidence adversely.
The declining trend in fixed capital formation and adverse Balance of Payment, which is steadily growing courtesy falling exports, are worrisome. Despite all these indications, the latest PMI for manufacturing and possibilities for increasing the margins for commodities, including steel and cement, are clear signals of revival.
Added to this is the possible return of China to a higher growth path. Crude steel production at around 720 million tonnes in 2012 exhibits about 4.5 per cent growth over the previous year. The apparent steel consumption reached around 640 million tonnes with 4.1 per cent growth projected in 2013.
The demand for iron ore by China in 2013 has been projected to be approximately 1.1 billion tonnes, out of which around 62 per cent would be imported. China has imported about 743 million tonnes of iron ore in 2012. The continuation of rising demand by China for raw materials to cater to the increasing demand from construction, machinery and equipment sectors is likely to add fuel to the market for iron ore that has already reached $154/t cfr China for Indian ore fines. The higher prices would enable many of the ore plants in China to commence production and enhance capacity utilisation.
However, the financial system in China is plagued with a host of internal problems and if the new leadership fails to institute a proper regulatory mechanism, the massive unpaid bank loans with strong pressures from the provincial governments to further extend credits may lead to a financial disaster.
This is where India must exploit its fundamental strength to achieve greater trust in the regulatory mechanism of its financial institutions, particularly when the economy is in dire need of a revival. The steadfast rigidity of RBI not to bring down the interest rate to rein in inflation has yielded mixed response and cannot be termed as successful. In the coming