Prime Minister Manmohan Singh said on Friday that a part of the depreciation of the currency is just a necessary adjustment given high inflation in the country and the decline in value of rupee has pushed up competitiveness of exporters which should aid efforts to control current account deficit.
Addressing the members of the Indian parliament, he said that while he expects growth to be flat in Q1, growth should pick up in the second half of the current fiscal year ending March 31, 2014. He based his optimism on good monsoons, which is expected to boost growth in the agricultural sector, besides positive impact of some recent reform measures, including norms for FDI, resolution of some tax issues and fuel subsidy reforms besides positive exports.
“There may be short-term shocks to our economy and we need to face them. That is the reality of a globalised economy, whose benefits we have reaped in the last 15 to 20 years,” he said.
The PM said the country needs to ensure that the fundamentals remain strong so that India continues to grow at a healthy rate in the future. “That we will ensure. We are no doubt faced with challenges, but we have the capacity to address them. It is at times like these that the nation shows what it is truly capable of.”
Current account deficit and fiscal deficit
Manmohan Singh said the country’s current account deficit (CAD) was modest till 2010-11 and even weathered the crisis year of 2008-09. Since then, there has been deterioration, mainly on account of huge imports of gold, higher costs of crude oil imports and recently of coal, besides weak demand for exports given the global economic scenario, especially iron ore exports, he said.
The prime minister said all these factors have made the country’s current account deficit unsustainably large.
“Clearly we need to reduce our appetite for gold, economise in the use of petroleum products and take steps to increase our exports,” he said.
He said the government will take all steps to ensure the CAD remains below $70 billion this year and some measures are already showing results with a declining trade deficit in both June and July. He reiterated that the medium-term objective is to reduce CAD to 2.5 per cent of the country’s GDP.
“Our short term objective is to finance CAD in an orderly fashion. We will make every effort to maintain a macro economic framework friendly to foreign capital inflows to enable orderly financing of CAD,” he said.
Talking about the concerns about the size of the fiscal deficit, the PM said the government will do whatever is necessary to contain the fiscal deficit to 4.8 per cent of GDP this year. “The most growth-friendly way to contain the deficit is to spend carefully, especially on subsidies that do not reach the poor, and we will take effective steps to that end,” he said.
Manmohan Singh said the movement of the exchange rate of the rupee is a matter of concern for the government. Attributing it to the US Fed’s signal that it may soon taper its quantitative easing, he said, “We must realise that part of this depreciation was merely a needed adjustment. Inflation in India has been much higher than in advanced economies. Therefore, it is natural that there has to be a correction in the exchange rate to account for this difference. To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports.”
He said there are many sectors which are regaining competitiveness in export markets as a result of the fall in the exchange rate and that he expects the positive impact to be felt more strongly over the next few months which would in itself correct CAD to some extent.
“However, foreign exchange markets have a notorious history of overshooting. Unfortunately this is what is happening not only in relation to the rupee but also other currencies,” he said.
Dispelling concerns that capital controls are on the horizon, he said that the government is not contemplating any such measures.
“The last two decades have seen India grow as an open economy and we have benefitted from it. There is no question of reversing these policies just because there is some turbulence in capital and currency markets,” he said.
The PM added that the sudden decline in the exchange rate is certainly a shock but it will be addressed not through capital controls or by reversing reforms.
“Growth slowed down in recent quarters. I expect growth in the first quarter of 2013-14 to be relatively flat, but as the effects of the good monsoon kick in, I expect it to pick up,” he said.
He pointed several reasons to support his optimism including the decision to revive stalled projects which is expected to start bearing fruit in the second half of the year.
“The full effect of the growth friendly measures that have been taken over the last six months, such as liberalising norms for FDI, resolution of some tax issues of concern to industry and fuel subsidy reform will come into play over the year resulting in higher growth particularly in manufacturing. Exports are also starting to look up as the rest of the world is improving its growth. So I believe growth will pick up in the second half of the fiscal year barring extreme unforeseen eventualities,” he said.
He said the fundamentals of the Indian economy continue to be strong. India’s overall public-debt to GDP ratio has been on a declining trend from 73.2 per cent of GDP in 2006-07 to 66 per cent in 2012-13. Similarly, India’s external debt is only 21.2 per cent of GDP and while short-term debt has risen, it stands at 5.2 per cent of GDP, he pointed out.
Manmohan Singh acknowledged that the depreciation of the rupee and rise in dollar prices of petroleum products will lead to some further upward pressure on prices. “The RBI will therefore continue to focus on bringing down inflation. The favourable monsoon and the anticipated good harvest will help bring down food prices and ease the task of controlling inflation,” he said.
Addressing concerns on the asset quality of loans by the banking sector, he acknowledged that Indian banking sector has seen some rise in bad loans.
“The question that needs to be asked is whether there is a liquidity problem or a solvency problem for the borrowers. My belief is that there is a liquidity problem,” he said.
Thee PM said that many projects are not unviable but only delayed, in contrast to the overbuilding that has characterised the banking sector problems in other countries. “As these projects come on stream, they will generate revenue and repay loans. Our banks are fortunately well capitalised much above the Basel norms and have the capacity to provide for any non-performing assets until those assets are turned around,” he added.
Manmohan Singh said that the easy reforms of the past have been done. “We have the more difficult reforms to do such as reduction of subsidies, insurance and pension sector reforms, eliminating bureaucratic red tape and implementing Goods and Services Tax. These are no low- hanging fruits and need political consensus,” he said.
He appealed to the parliamentarians to forge consensus on vital issues.
(Edited by Joby Puthuparampil Johnson)