Higher exports and weak imports have provided enough room for India’s merchandise deficit to narrow. However, weak IIP growth, high inflation require immediate corrective action, says SBI Research
Trade numbers released on Monday indicate export growth at merely 3.5% and imports de-growth at 15.2%. As result the overall trade deficit widened marginally to $10.1 billion. It is now believed that FY14 CAD (current account deficit) should go below $40 billion. These are the findings of SBI Research note on Indian economy.
Higher exports and weak imports have provided enough room for India’s merchandise deficit to narrow. This is summarised in the following chart:
The bad news is that IIP (Index of Industrial Production) numbers for the month of November 2013 registered a negative growth of 2.1%. Dismal performance of consumer goods sector continues to be a cause for concern with consumer durables recording a decline of whopping decline at 21.5%, a new low post May 2013. The growth in consumer durable sector is markedly related to CPI (consumer price index) inflation. The galloping inflation now mirrors in galloping contraction in IIP consumer durables, points out SBI Research in its note. This is shown in the graph below:
High inflation has also dented financial savings as reflected in the lukewarm response to CPI-linked inflation index bonds of RBI. These alarming trends require immediate corrective action, warns the research note.
The research note argues, “We believe if the inflation trajectory softens markedly in December 2013, the RBI may have room for reverse policy action/ rate cut at a future date.”
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