Is the India Economy Overheating?

By Vipin Agnihotri

There is a complete integration of the Indian capital market with the rest of the world, in particular the US market. While this development has its antecedent benefits as well as problems, it is certainly heartening to note that in the growth sphere, leading global economies have seemingly managed to de-couple themselves from the US economy, despite greater liberalization and integration via trade; India is no exception.

The question now arises: Why is this relevant? For, India continues to post healthy growth rates in the current year, its economy having expanded at a record 9.4 percent in the financial year 2006-07 on a base of 9 percent clocked in the 2005-06, despite tighter monetary policy by the central bank to cool inflationary pressures.

No doubt, sterling performances by services and manufacturing sectors helped, with the latter growing at 12.3 percent as against 9.1 percent in the previous year. Though, the threat of a overheating of the economy continues to loom large, exacerbated by the high rate of inflation and the continuous inflow of foreign capital, which is making the monetary policy tools ineffective and putting pressure on the rupee.

Reserves have risen rapidly in recent months on the back of rising foreign investment, higher remittances and increased overseas borrowing by Indian companies. The Indian government is now working on a scheme to refund local taxes and levies to labour intensive industries with little import content, to offset the impact of the appreciating rupee.

With the dollar threat threatening to become a deluge, however, from the single-minded focus on tinkering repo rates and the CRR, the RBI, in its latest annual monetary policy statement has turned its attention to measures that could arrest capital inflows, which complicate both exchange rate and liquidity management. How successful it will be, only time will tell.

The rising rates have been a dampener on both the consumer and investment sentiments within the country. The Indian economy has been witnessing a paradigm shift and is all set to enter the high growth phase. But there are concerns on the levels it can attain. ADB estimates an 8 percent rise for this year, while IMF projects an 8.4 percent growth, which is further expected to slow to 7.8 percent in 2008.

Single digit growth in exports, slowdown in production of consumer durables and power generation are some leading indicators for the likely slowdown of the Indian economy in 2007-08.

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India Wants to Export $200 Billion a year to USA

By Vipin Agnihotri

It has come into the notice of The India Street that the Indian Commerce ministry has revised the export target to US $ 160 billion for the year 2007-08, and to US $200 billion for 2008-09. In my opinion, these are very ambitious targets, especially when one take into account the fact that rupee is appreciating.

It is worthwhile remembering that despite the appreciation, immediate export figures for April has shown a growth of 23 percent, while the trade deficit has widened. Last year, commerce ministry unveiled the annual supplement to the foreign trade policy, announcing changes that fell far short of the expectations.

“The major modification, which exporters had looked forward to, was related to duty leviable under the Export Promotion Capital Goods (EPCG) scheme,” pointed out Rahul Singh, noted economist based at India. Not so long ago, the finance minister had brought down the basic customs duty on most capital goods to 7.5 percent. Therefore, expectation was that the duty payable under the EPCG scheme would be brought down from 5 percent to say 2.5 percent or even zero.

At this point of time, the effective duty saving for most manufacturers or service providers, who can take Cenvat credit is around 3.11 percent and for most others around 25.86 percent. The export obligation for almost all is around 2.06 times the value of the capital goods imported, which is down from the 2.53 times of before, when normal basic customs duty rates were brought down from 12.5 percent to 7.5 percent on most capital goods.

An important modification that the commerce ministry announced related to import of spares under the EPCG scheme. Fact remains that spares of any imported capital goods can be imported under the scheme, but the actual text of the foreign trade policy says that spares of any existing capital goods, whether imported or not, can be imported under the scheme.

The customs notification deletes the clause that payments received against counter sales in freely convertible foreign exchange, through banking channels as per RBI guidelines shall be counted for fulfillment of export obligation in case of service provider in the retail sector.

Interestingly, customs notification does not say that foreign exchange counted towards fulfillment of export obligation (over and above the average) shall not be eligible for incentives/ rewards under promotional schemes. More duty credits are expected to hit the market very soon, bringing down the premium on duty credits under these schemes and Duty Entitlement Passbook schemes. Indian economy now awaits the impact on inflation control measures of the government.

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