Government considering free trade pacts for food, writes Shivaji Sarkar
The feel-good factor could be impacted as RBI believes that the growth from lower inflation will remain elevated and crude prices will hover around $100 a barrel. The RBI’s Monetary Policy Committee (MPC) revised assumption for the price of crude oil to forecast inflation and growth is significantly higher than the previous one. Growth is expected to decline to 7.2% from 7.8% even as it keeps the repo rate unchanged at 4% and reverses the repo at 3.35%, meaning interest rates will remain low.
Sales price inflation averaged 6.3% in the first quarter (April-June 2022), 5% in the second quarter, 5.4% in the third quarter and 5.1% in the fourth quarter (January-March 2023 ) will be a concern. The wholesale rate remains at 13%. Inflation projections have been revised upwards mainly due to war-induced factors, according to Reserve Bank of India (RBI) Governor Shaktikanta Das. “In the order of priorities, we have now put inflation ahead of growth. Now is the time to prioritize inflation over growth,” the RBI Governor said. This can lead to difficult times as public finances can be affected by the response to inflationary pressures.
The CMIE finds that the slower rate of recovery after the second pandemic wave may reduce consumer sentiment and by March 2023 it could be 15% lower. On the other hand, 83 unicorns worth $277 could create 11 million jobs, according to Nasscom-Zinnov. Net non-farm employment growth must increase sustainably through 2030 at 1.5% per year, so that there are at least nine million jobs. This could be delayed as lower consumer sentiment affects manufacturing and other businesses. The challenges are many. India’s foreign exchange (forex) reserves fell by $14 billion, although it is still considered comfortable with reserves of $619 billion. The value of gold reserves also decreases by $1.831 billion to $42.011 billion.
Proposals for foreign investment in infrastructure are fraught with risk. There are suggestions from former RBI Governor Bimal Jalan that infrastructure development should be done in rupees. This would cover the rupee and the economy. Higher FDI would also lead to higher repatriation expenses. Jalan suggests tax cuts and says rising gasoline prices, supposedly the highest in the world, are cause for concern. As predicted by UNCTAD in its Asia-Pacific report, it is fueling the discontent seen by the taxi strike against the rise in the price of CNG. No action is on the table when the need is to protect the Indian economy, says Das. Some more belt-tightening is possible although the center is willing to adhere to the possible extent of its budget programs.
Meanwhile, the government accepting the initiative of the International Energy Agency has joined its initiative for a coordinated release of 120 million barrels of oil from its emergency reserves to calm oil prices. . India has a daily consumption of 4.5 million barrels and a reserve of 39 million barrels, not considered high. Also in November 2021, it agreed to release 5 million barrels from its reserve as part of a US-led initiative to drive down crude prices when they rise above $80 a barrel.
These initiatives hinder the harmonious growth of the country. The Indian Economic Monitoring Center (CMIE) says the slower recovery does not bode well. Various international obstacles add to the risks. These consumer sentiments can affect spending and therefore the growth of private final consumption expenditure, which accounts for about 55% of the country’s GDP.
Consumer confidence rose 5% in January, but in March it fell to 3.7%. The average monthly rate of increase over the last three months is 4.23%. It would take three years to return to the pre-covid level provided there is no further jolt to the economy. The RBI apparently took notice.
The war-related sanctions against Ukraine imposed by the United States also affect Indian exports to some extent. The relationship with Russia through goods is at a low level. Trade accounts for less than 2 percent. Under the current circumstances, it may not be able to increase. New insurance conditions banning flights to Russia and Ukraine have led Air India to suspend flights to Moscow. Russian carrier Aeroflot has also halted flights to Delhi. India has reaffirmed its ties with Russia despite also facing Western pressure over its suspension from the UN Human Rights Commission. India may have to reposition its diplomacy.
The government has concluded various international rapprochements to overcome the crisis. The latest free trade pact with Australia aims to counter China. It is a trust, says Australia, that it has in India. It opens avenues for imports of coal and other raw materials and is likely to export clothing, pharmaceuticals, steel and other products. Exports to Australia are only $345 million. It also allows Australian liquor companies and other companies to establish their units in India.
Another move to invite companies from Gulf countries to invest in Kashmir is seen as a major win. These companies, during their meeting with the governor, said they had identified 4,226 sites for hotels, tourist resorts and factories under the FTA with the United Arab Emirates. While this is seen as a good move for the development of the state, it has also raised some concerns within Parivar.
Meanwhile, phasing out imports of 101 additional defense items will boost autonomy and save currency. The plan is to make the country a global hub for defense manufacturing. It could be an important source of income for forex and create an aura for the country. It is hoped that these will gradually resolve the issue of the trade balance. At present, despite $400 billion in exports, there remains a trade deficit of $192 billion as imports by value have become expensive. This also adds to the exchange loss despite higher income. It is not easy to overcome this as the Rupee continues to slide past Rs. 75. In the current global scenario, boosting the Rupee is a task.
Amid these problems, FDI increased to over $560 million. It shows the investor’s confidence in the country’s policies. The country is going through a difficult phase but it must recover for a bright future.
(The writer is a seasoned journalist, socio-political economy observer and media scholar)
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Posted: Monday April 11th 2022, 08:37 IST