Even as the keenly watched HSBC manufacturing PMI on Friday showed India’s manufacturing activity contracted for the third consecutive month in October, finance minister P Chidambaram found imminent green shoots in the economy that he hoped would multiply with businesses not sitting on cash but investing it. On a day the BSE Sensex closed at its third straight record closing high of 21,196.81 points, the minister re-estimated the current account deficit (CAD) for FY14 to be $60 billion or even less (compared with $70 billion estimated earlier), helped by “severely compressed” gold imports and the pick-up in exports.
Chidambaram refrained from making any fresh projection about economic growth for the fiscal (the government's official estimate for FY14 GDP growth is now 5-5.5% and the RBI earlier this week cut its projection to 5%) but said the “satisfactory” 8% growth shown by key infrastructure industries in September, along with good exports and a good monsoon augured well for the economy. Analysts were, however, unconvinced about whether the demand slump in the economy has indeed bottomed out.
The minister promised further government efforts to prop up growth by clearing more stalled projects and giving a boost to the manufacturing sector. He said the government will try to get the long-pending insurance amendment Bill, which seeks to raise foreign direct investment cap in the sector to 49% from 26%, passed in the forthcoming winter session of Parliament. The draft amendments to the proposed Direct Taxes Code have been finalised and would be placed before the Cabinet for approval soon, he added.
“Today I can say that CAD (for FY14) is likely to be perhaps $60 billion or less,” he said, revising the previous estimate of $70 billion. CAD stood at 4.8% of GDP ($87.8 billion) in FY13, an all-time high.
Citing trade data, Chidambaram said that the 5.14% surge in exports in the first half of the fiscal and a 1.8% contraction in imports have led to the trade deficit in the April-September period easing to $80 billion from $92 billion in the same period a year ago. “Overall, trade deficit will be contained and it will get reflected in the CAD,” he said.
In a similar vein, PMEAC chairman C Rangarajan said in Kolkata on Friday: “If the present trend in exports and imports continue, the current account deficit may remain well below $70 billion. Capital flows will not only be adequate to cover the deficit but may even add to reserves.”
Rangarajan pointed out that over the next few years India needed to take the CAD to a more comfortable level of 2.5% of GDP. “The level of comfort is related to the capital flows that can come in without any extraordinary efforts,” he said.
Chidambaram said his personal view is that the rupee, which traded on Friday at 61.74 against the dollar, was slightly weaker than “appropriate exchange rate” although he hastened to add there was nothing called appropriate exchange rate. He expressed satisfaction that the rupee has stabilised.
The minister was also hopeful that the still high wholesale price-based inflation, 6.1% in September, will see moderation because of the good monsoon, the fiscal discipline of the government and the steps taken by the Reserve Bank of India. “What we can do, we will do in terms of the fiscal policy, what can be down through monetary policy, the RBI will do and what we can do with our food stocks, we will do,” he said.
Chidambaram said the bumper crop this year would boost agriculture GDP growth this year. Last month, the PMEAC projected 4.8% growth for agriculture in 2013-14, compared with just 1.9% last fiscal, thanks to good monsoon rains.
The economy grew just 4.4% in the quarter through June — the slowest quarterly expansion in four years — as manufacturing and mining contracted. Chidambaram pointed out that although manufacturing sector growth appeared poor, certain sectors such as automobiles showed higher exports in the first half. Passenger vehicles export grew 13.7% in the period. “If any sector needs any specific measures and if the department of industrial policy and promotion proposes, we will look into it,” he said.
“The RBI estimates GDP growth for 2013-14 at 5%, I have estimates from the PMEAC which expect GDP to grow at above 5%. I also have my economic division, which expects GDP growth at 5-5.5%," he said.
He also said that foreign investors have retained their confidence in the Indian economy. The government is resolved to extend full support to new investment proposals and that if anyone encounters any difficulty, it will be addressed, he said. Out of a total 344 stalled projects, the government has so far cleared 99 projects that entail a collective investment of Rs 3.67 lakh crore in the last six months. The 16.8% growth in gross bank credit also indicated that demand for funds is picking up. Chidambaram said the RBI has now withdrawn all liquidity tightening measures and what is in force now was a normal monetary policy.