India's fiscal deficit

India plans to halve its fiscal deficit by 2013-14 and is well on its course to achieve that target, thanks to it high GDP growth. While briefing media persons on his return journey from Toronto, Prime Minister Man Mohan Singh said, As far as India is concerned, our banking system remains well-managed and our economy is growing at a rate of 8.5% per annum. Our fiscal position is a cause for concern, but when we compare our fiscal deficit or debt-to-GDP ratio with those of major developed countries, I think we have come out much better.

But my point is that even better may not be as good as good. To my mind, the Indian economy is emitting mixed signals, notwithstanding the statistical cloak it might don. All our projections of growth are based on a weak base during 2009-10 which was forced on India due to global economic downturn. It is very much like the Government announcing that there has been a decline in inflation, including food inflation, whereas the fact of the matter is that the prices of all food articles are galloping. Even the last year's performance is still not final and the projection for the current year is even more hypothetical and tentative. The way inflation is being promoted by the present Government by increasing the costs of inputs both for industry and consumption, there would be visible impact on inflation, as per the analysis and opinion of our Finance Secretary.

True, the Government might succeed in reducing drain of public expenditure on subsidy, but this could be countered by the general inflation, particularly food inflation, which would ultimately reflect in increased cost of production with its own implications on domestic consumption and inflation; and of course, exports. The Government might have hit a jackpot by way of unimagined level of revenue from 3-G spectrum, but the inevitable and imminent escalation of inflation will undo what has been an unexpected bounty.

India's trade deficit stood at $117.3 billion in 2009-10 down from $118.7 billion in 2008-09. This should have cheered Government of India. But the sad part of the story is that a survey in April forecast suggests that the gap would widen to $132.70 billion in 2010-11 which would further enlarge to $ 154.50 billion in 2011-12. This view is based on the premises that with the rebound in the economy, the demand for manufacturing and oil imports would go up, while the Euro zone debt crisis would hit exports. A wider deficit would pressure the partially convertible Rupees, which has lost more than 5% from its 2010 peak of 44.18 to the US dollar. A recent survey says that every increase of $1 per barrel in Indian crude basket prices pushes up the annual import bill by $1.2 billion dollars.

Impact on Indian Exports

A recent survey acknowledges that the EU accounts for a fifth of India's exports and if the crisis there is prolonged or takes a turn for the worse, it could widen the trade deficit by hurting demand from the 27-nation bloc. We must take into account the looming uncertainly that has not let world economy go out of its grip and this is not confined only Europe, but also US, which together account for more than 66% of Indian textile and garment exports. These are very important export destinations and can and will certainly strongly influence the export scenario for any country, including India. Says Rupa Tege Nisure, Chief Economist at Bank of Baroda, "Exports look better than last year, but they will receive some setback because of Euro zone. There would not be a huge contagion, but global demand will weaken for our exports." Adds Ashish Vaidya, Head of Trading for Fixed Income Currencies and Commodities at UBS, Mumbai, It would depend on whether the risk aversion theme is back or not. I am of the view the Euro zone is in serious stress and the world is not as settled place as it was before 2008. All these are bound to impact India's export trade, including textile and garment exports.

The sermonisation in cool comfort of Air Force One might elate both the Prime Minister and the media on board, but the harsh and hot realities of Delhi now and later would be a real test of the assessment and projection made by our esteemed Prime Minister.