1. April 2013 INDIA
Political & Policy Issues to Watch
The Food Security
Bill can upset all
calculations
While the Finance Minister deserves credit for the fiscal control he has implemented
though the Finance Budget, his effort will be partially undermined when Parliament
reconvenes on April 22. At the top of its list is likely to be the Food Security Bill, a
populist entitlement programme that guarantees subsidised food grains for almost
two thirds of India’s population. Besides the fact that India’s creaking food
distribution infrastructure will inevitably allow large leakages, the Bill can potentially
impose an annual cost of Rs 2 tn on the Treasury, against Rs 850 bn currently. The
FM has bravely provided for a mere Rs 100 bn in the current year as incremental
expenditure, possibly hoping that the scheme will only be rolled out partially – but
that hardly diminishes the longer term threat.
The risk stemming
from the UPA’s
populism is
becoming evident
The UPA may go a step further with its pre-election populism. A committee under
the Ministry of Social Justice is reportedly working on a draft bill to make it
mandatory for the federal budget to spend 22.5% of development funds for
backward classes. The law may take months to come about, but the developments
point to the heightened economic risk posed by the UPA’s brand of ‘welfare’ politics.
The UPA loses an
ally…
…but still has
sufficient numbers
in Parliament
India voted in favour of a US-sponsored resolution at the UN Human Rights Council
(UNHRC) asking Sri Lanka to ensure justice for alleged human rights violations
during three decades of ethnic conflict. This did not satisfy its ally, the DMK, which
withdrew support claiming the UPA did not do enough to protect the interest of the
Tamil population in Sri Lanka. Despite this loss of 19 MPs however, the UPA is safe
in terms of numbers and the Opposition has refrained from moving a no-confidence
motion. The UPA should be able to safely complete its remaining term in office.
Outlook for the Market
Finally, export
growth begins to
recover
The external
situation is delicate
In January, India’s export growth turned positive after nine months and continued a
slow recovery the next month, taking cumulative growth to USD 266 bn, down 4%
YoY. With imports almost flat, the trade deficit has increased to USD 182 bn (over
10% of GDP), and the current account deficit (CAD) to a record 6.7% of GDP in
Q3. Despite an increase in foreign capital flows in Q3, the capital account surplus is
just about equal to the CAD, leaving the economy vulnerable to external shocks via a
reversal in capital flows or a drying up of external commercial credit. The risk will
become particularly relevant as the US reverses its quantitative easing later this year
and global liquidity begins to tighten.
Growth remains
muted…
…rates will not be
cut in a hurry
2013 has started on a weak note, with passenger vehicle and two wheeler sales down
8.6% and 3.4% ytd, respectively, for the first two months. IMA’s recent salary survey
indicates an average white collar pay rise of 10-12% this year (5-10% for senior
management) and hiring rates have not significantly improved from last year. The
Government effected a second hike in the retail price of diesel last month which is
good from a fiscal point of view, but will stoke inflation. This means that the RBI,
which cut rates by 25 bps in March, will be cautious in further monetary easing.
FFiissccaall yyeeaarr ssttaarrttiinngg 11 AApprriill 2009-10 2010-11 2011-12 2012-13 2013-14
GDP, real growth, % 8.4 8.4 6.5 4.8 6.0
Inflation - WPI, year average, % 3.8 9.6 8.9 7.3 5.8
Inflation - CPI, industrial workers, yr avg, % 12.4 10.5 8.4 10.0 7.3
RBI lending (repo) rate, year end, % 5.0 7.25 8.5 7.5 7.0
Rupee to US$1, RBI Ref Rate, yr end 45.1 44.7 51.2 54.5 57.5
Adit Jain, Chairman, IMA India
Tel: (91-124) 4591 200 Fax:(91-124) 4591 250 Email: aditjain@ima-india.com
