We hear that the Finance Minister is planning institutional investor roadshows in the US, Canada and Japan. Last month, he made elaborate presentations to FIIs in Hong Kong, Singapore and London. The aggressive pitch made by the top man himself is certainly unprecedented but so is the issue he is trying to address.
Years of neglect has resulted in India rapidly losing global competitiveness. The exorbitant cost that Indian manufacturers pay for almost every factor of production – land, capital, power – has rendered them toothless at the global level. Labor arbitrage, for years our strength, is also on its way out of the window. Wage rates have increased rapidly over the last few years on the back of supply constraints created by the leaky but still somewhat effective employment guarantee NREGA program implemented by the Government.
As a result of these constraints, new capacities have been limited and only two million jobs were created in the country over the second half of the last decade. Take out casual jobs in rural areas (read NREGA once again) and there was actually a 15 million contraction in the corpus of jobs. This against the targeted increase of 55 million. All this can change, of course, once the New Manufacturing Policy, advocating employment-intensive industrial expansion, sees the light of day.
So where does all this get us? Seems like nobody wants to buy ‘Made in India’ stuff any longer. The aggressive export growth targets we set for ourselves are distant pipe dreams. The $ 300 billion level crossed last year is likely to be missed this time. Meanwhile, imports into India showing less sensitivity have marched on relentlessly, up 10 percent this year, and it’s not all from our lust for gold.
The result is that merchandise trade deficit will cross $ 200 billion this year. At 10 percent of GDP, this is far ahead of any other major global economy. And the gaping hole is only getting bigger – in recent months, our trade deficit has been hitting $ 20 billion – but still needs to be filled up. Services exports and remittances help to some extent but the current account deficit is nonetheless out of control. CAD hit an all-time high of 5.4 percent of GDP in July-September and could easily cross 6 percent in October-December.
That’s close to $ 10 billion a month at the mercy of capital inflows – FDI and FII.
FDI has declined considerably this year for two possible reasons. One, global economic weakness usually constraints investors to look overseas, and two, India has not exactly acted in the most amenable manner welcoming investors showing long-term commitment.
So that leaves easy-come, easy-go FIIs who continue to bestow kindness upon us, linked to the liquidity tap kept permanently turned on in the developed world. In the past, while the CAD gap was smaller, FII inflows would provide the fill and impact the exchange rate significantly at the same time. A year back, in January-March 2012, FIIs invested $ 3 billion monthly and the Indian rupee gained almost five percent on the dollar. Over the next quarter, FII inflows stopped completely and the dollar gained 11 percent. But that’s in the past. Between July and November, FII inflows exceeded $ 2 billion monthly but the rupee gained just 2 percent on the dollar. Since then, in three months till February this year, FII inflows average way over $ 4 billion a month but the rupee has shown no strength.
The conclusion would be that India needs the monthly $ 4 billion fix to keep functioning anywhere even close to normal. That explains the roadshows. Else, the economy and the rupee are out of the window too!