Statistical Analysis:
The Indian economy expanded at a slower rate in Q3 to 4.7% from 4.8% in Q2 of 2013 due to contraction in growth of manufacturing (1.9%) & mining (1.6%) sector and political uncertainty ahead of general elections.
Index of Industrial Production
Manufacturing sector mainly contributes to the GDP growth of an economy, however, services sector replacing the manufacturing position in terms of contribution in the growth. Finance Minister in his budget speech mentioned, “Manufacturing is the Achilles heel of the Indian economy. The deceleration in investment in manufacturing is particularly worrying. Consequently, there is no uptick yet in manufacturing.”
Manufacturing sector dominates the index of industrial production; however, the growth in the manufacturing production is increasing at a decreasing rate, hovering around 180 to 190 units. Lack of domestic demand is the reason behind lackluster performance of manufacturing units, as consumer spending is capped by high interest rates. Foreign exchange volatility in the external environment prevents investors from investing in an economy which hinges the industrial growth.
Inflation
Wholesale price index and Consumer price index are on decreasing side from November 2013 onwards, leaves the near term expectations slightly low, however, core inflation is continue to be a concern.
Robert Prior-Wandesforde, director for non-Japan Asia economics at Credit Suisse stated in a note, “We believe the next move is more likely to be up than down, particularly as Governor Rajan begins to focus on the task of bringing headline consumer price inflation down to 6% by early 2016,” FocusEconomics Consensus Forecast panelists expect WPI to average 5.8% and 5.7% in FY 2014 and FY2015, respectively. High prices and sluggish growth presents a gloomy picture at global front.
Foreign Trade
Exports declined in H1 2013 due to sluggish global demand. However, it registered a double digit growth in July (11.64%) and October (13.47%) as sharp depreciation of rupee supported the growth. Lower Gold demand declined the total imports of the economy. On the lower imports and healthy exports, trade deficit got narrowed, helped curb CAD.
Current Account Deficit
Gold imports and crude imports are major factors influencing the current account deficit figure in the Indian economy.
Three times hike in gold import duty to 10% in 2013 and other import restrictions curb gold import have contributed to the improvement in CAD, dropped to 0.9% in Q3 from 4.9% in Q1 of 2013. Further, tighter lending norms, weak domestic demand and an increase in exports have improved current account deficit in 2013 to its lowest in three years at -2.6% of GDP from -5.0% in 2012.
Conclusion
There is a need to improve the economic condition of an Indian economy; however, prevalence of impossible trinity creates a dilemma which makes it difficult for the central bank to manage all three indicators (fixed exchange rate, free capital movement, an independent monetary policy). A rebound in exports contributes to lower the current account deficit and high growth expectation in near future. In April 2014, RBI is likely to maintain status quo on key policy rates, on the back of softening WPI. CPI is likely to be higher in March due to problems in agriculture.
