RBI data shows CAD narrowed to 2% of GDP in Q1 FY20 from 2.3% in Q1 FY19
The country’s current account deficit (CAD) narrowed to 2% of GDP, or $14.3 billion, in the first quarter of the current financial year from 2.3% of GDP, or $15.8 billion, reported during the same period of the previous year, data released by Reserve Bank of India (RBI) showed.
However, the gap was bigger than the preceding quarter which was $4.6 billion, or 0.7% of GDP.
“The CAD contracted on a year-on-year basis, primarily on account of higher invisible receipts at $31.9 billion as compared with $29.9 billion a year ago,” the RBI said.
The net foreign direct investment was $13.9 billion in Q1, up from $9.6 billion last year. During the quarter, foreign portfolio investment recorded a net inflow of $4.8 billion as against an outflow of $8.1 billion in Q1 of 2018-19, on account of net purchases in both debt and equity markets.
“There were number of factors which led to lowering of current account deficit. One is software receipts have gone up, and also private transfers have also gone up. So, I would say the invisible accounts have helped to contain the deficit,” said Madan Sabnavis, chief economist, CARE Ratings.
“Trade deficit has been lower due to lower crude oil prices.
“Also, I think the demand has come down. It is a combination of both,” Mr. Sabnavis added.
RBI data showed net inflow on account of external commercial borrowings was $6.3 billion against an outflow of $1.5 billion a year ago.
Net services receipts
Net services receipts rose 7.3%, mainly on the back of a rise in net earnings from travel, financial services and telecommunications, computer and information services.
“In Q1 of 2019-20, there was an accretion of $ 14 billion to the foreign exchange reserves (on BoP basis) as against a depletion of $11.3 billion in Q1 of 2018-19,” the RBI said.
States’ gross fiscal deficit stayed within 3%: RBI
‘Metric achieved by lowering capex’
States’ gross fiscal deficit (GFD) has remained within the Fiscal Responsibility and Budget Management Act (FRBM) threshold of 3% of gross domestic product (GDP) during 2017-18 and 2018-19, a Reserve Bank of India report on State Finances said. For 2019- 20, States have budgeted a consolidated GFD of 2.6% of GDP, the report said. However, outstanding debt of States have risen over the last five years to 25% of GDP, posing medium-term challenges to its sustainability.
Observing that in the recent five-year period, the combined GFD of the States (excluding Ujjwal DISCOM Assurance Yojna in 2015- 16 and 2016-17) averaged 2.5% of GDP, which was in striking range of the recommendation of the FRBM Review Committee, the report said and added that this has, however, been achieved by a sharp reduction in capital expenditure.
“This has, however, been achieved by sharp retrenchment in expenditure, mainly capital expenditure, with potentially adverse implications for the pace and quality of economic development, given the large welfare effects of a much wider interface with the lives of people at the federal level,” the report said.
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Core sector growth slips to 52-month low
Five out of 8 sectors in negative zone
Growth in the eight core sectors in August slumped to the lowest in four years and four months. That is, the -0.5% registered in August 2019 was the lowest since April 2015.
Growth in five out of the eight sectors of the Index of Eight Core Industries fell into the negative zone in August. The index had registered a growth of 2.7% in July 2019 and a robust 4.72% in August 2018.
“The contraction is surprising because last month it was about 2.7% or so,” D.K. Srivastava, chief policy adviser at EY India, said.
“It is an indication of a continuing slowdown and weak demand in the system. The core sectors reflect demand from the power and infrastructure sectors, where the government’s own demand is important and public sector spending has been low in the last 3-4 months, so that could explain the contraction.”
Within the Index, the coal sector saw the sharpest contraction, with the sector contracting 8.6% in August 2019 compared with a contraction of 1.6% in the previous month. This is the sector’s worst performance in three years.
The crude oil sector contracted 5.4% in August, compared with a contraction of 4.4% in July. August marked the 21st consecutive month of contraction for the sector. Notably, the cement sector fell into negative territory in August, contracting 4.9%, compared with a growth of 7.9% in the previous month.
The natural gas sector contracted 3.9% in August, compared with a contraction of 0.5% in July. The sector has now contracted in four out of the last five months, with it having zero growth in the fifth. The electricity sector also saw a contraction in August, contracting 2.9%, compared with a growth of 4.7% in the previous month.
Mr. Srivastava said the contraction also suggests that the slowdown is continuing in the broader economy as well, adding that it is highly likely the RBI would cut interest rates again at its October 4 meeting.
“It does indicate on a broader basis also the economic slowdown is continuing and signs of a revival are not visible,” he said.
At a panel discussion hosted recently by the students of Delhi’s Ambedkar University, the topic was, ‘Are we heading for an economic crisis?’ Presumably, they had been prompted by the all-absorbing news of a slowing economy. It is indeed correct that such a slowing is taking place. Growth has slowed for the past few quarters — the past two-and-a-half years, if we go by annual growth rates.
That this has not been comforting to the government is evident from the fact that its Ministers are running from pillar to post in an effort to goose the economy. But should we be worried?
Those who heard the address to the United Nations climate change summit by the teenager Greta Thunberg earlier this month may not be as worried about economic growth as the government is. Globally, industrial growth driven by mindless consumption is the cause of climate change, now unmistakably upon us. But India does need some growth as income levels here are still very low. The problem of low incomes can, however, be tackled even with less growth so long as it is of the appropriate type. So, the slowing of growth in India cannot reasonably be termed a crisis.
There is, however, one feature of the economy that does answer positively to the query of whether it is in crisis today, and that is unemployment. Figures reported in the report of the last Periodic Labour Force Survey point to a dramatic rise in the unemployment rate since 2011-12, when the previous survey on unemployment was undertaken. Apart from the category of ‘Urban Females’, the most recent estimate of unemployment shows that it is the highest in the 45 years since 1972-73. But even for ‘Urban Females’, it is double what it was in 2011-12. For the largest cohort, namely ‘Rural Males’, in 2017-18, it is four times the average for the 40 years up to 2011-12. These figures should convince us of the existence of a grave situation, if not crisis, with respect to employment in the country. In the average country of the OECD, an increase in unemployment of such magnitude would have triggered a nationwide debate, not to mention agitation on the streets.
The government has responded to the slowing of growth by announcing a range of measures, the most prominent of them being the reduction in the corporate tax rate. While this may have a positive effect, the move is not based on the big picture. The tax cut is meant to be a remedy for stagnant corporate investment. But if the level of corporate investment itself reflects some underlying reality, it is only by tackling the latter that we can get to the root of the problem. A large part of corporate sales is driven by rural demand, reflected in the reported lay-offs by biscuit manufacturers. We do not hear their voices or, more importantly, the government does not, as they are less organized than some other sections of the corporate world, the automobile industry being one such.
The rural picture matters not only because the largest numbers are located there but also because of their low incomes. This means that the future growth of demand for much of industrial production is likely to come from there. After all, how many more flat-screen televisions can an urban middle-class household buy once it already possess one? The high unemployment rate for ‘Rural Males’ does suggest that we have zoomed in up to a reasonable degree of precision on the site of low demand.
We must now answer the question of why rural incomes are growing so slowly. The recent history of crop agriculture points towards one reason. In the nine years since 2008-2009, this activity has recorded zero or negative growth in five. Put differently, in the majority of years, it has shown no growth. The economy has very likely not seen anything like this since 1947.
When growth fluctuations include production decline, a particular feature emerges. Households incurring consumption debt in bad crop years would be repaying it in the good ones. This implies that consumption does not grow appreciably even in good years. Recognising the record of agricultural production is sufficient to grasp what we see in India today. This does not imply that other factors do not matter, and we could imagine several, ranging from low export growth to the state of the banking sector, but this does suggest that poor agricultural performance is a significant explanation of slack domestic demand. Unstable agricultural production first lowers the demand for agricultural labour and, subsequently, its supply, showing up in greater unemployment. It has been pointed out that the investment rate has declined. This is indeed correct but this may well be a reflection of the poor agricultural performance. Private investment both follows output growth and leads it. When non-agricultural firms observe slow agricultural growth, they are likely to shrink their investment plans and may not revise their decision till this growth improves. Thus, attempting to influence the private investment rate is to only deal with a symptom. It is rural income generation that is the problem.
Any long-term solution to the problem of unemployment to which the slowing growth of the economy is related must start with agricultural production. Observing the performance of crop agriculture for close to a decade since 2008-09, we might say that we are witnessing something wholly new in India. It has long been recognized that there is a crop-yield cycle related to annual variations in rainfall but we are now witnessing a stagnation. Now, unlike in the case of a cycle, recovery cannot simply be assumed. We would need the expertise of agricultural scientists to confirm what exactly is responsible for this state but it would not be out to place to ask if there is not a role for ecological factors in causing agricultural stagnation. These factors encompass land degradation involving loss of soil moisture and nutrients, and the drop in the water table, leading to scarcity which raises the cost of cultivation. Almost all of this is directly man-made, related as it is to over-exploitation or abuse, as in the case of excessive fertilizer use, of the earth’s resources. Then there the increasingly erratic rainfall, seemingly god-given but actually due to climate change entirely induced by human action. A deeper adaptation is required to deal with these factors. Intelligent governance, resource deployment and change in farmer behaviour would all need to combine for this.
It is significant that the reality of an unstable agricultural sector rendering economy-wide growth fragile has not elicited an adequate economic policy response. Policy focus is disproportionately on the tax rate, the ease of doing business in the non-agricultural sector and a fussy adherence to a dubious fiscal-balance target. It is now time to draw in the public agricultural institutes and farmer bodies for their views on how to resuscitate the sector. We may be experiencing an ecological undertow, and it could defeat our best-laid plans for progress.
Amartya Sen had once quipped that India’s unemployment figures were low enough to put many developed countries to shame. Professor Sen was, of course, not commending the country’s record in employment creation, but instead, highlighting the difficulties involved in measuring employment and unemployment in a developing country.
Unemployment has been at the centre of public debates in India recently. The government’s Periodic Labour Force Survey carried out in 2017-18 revealed that unemployment in the country reached an all-time high rate of 6.1%. What explains this sudden jump in unemployment in India, which had remained at a rather low rate of around 2% for several decades?
Our estimates based on official employment surveys and the Census show that in 2018, there were 471.5 million persons employed and 30.9 million unemployed in India.
At the heart of the unemployment problem in India were young, unemployed men aged 15 to 29 years who comprised 21.1 million or 68.3% of all the unemployed in the country. To understand how their numbers rose recently, we need to examine the behaviour of not just labour demand but also labour supply over time.
Rising numbers of job seekers
First, the size of labour supply in India is getting a boost from the rapid expansion of the working-age population in the country — the population of 15-59-year-olds increased at the rate of 14 million a year in the 2000s.
Second, the nature of labour supply is changing too, with increasing enrolment of young adults for education and their rising job aspirations. Of all 15-29-year-old females in India, 31% had been attending schools or colleges in 2018, up from 16.3% in 2005 (although, it needs to be mentioned here that there have been questions on the quality of education received and skills acquired by these young people).
Third, the size of the workforce engaged in agriculture (and allied activities) has been declining in India: from 258.8 million in 2005 to 197.3 million in 2018 (which still accounted for 41.9% of the total workforce in the country). This decline has been partly due to the ‘push’ from low-productivity agriculture, which has suffered due to stagnant public investment from the 1990s onwards. The decline has also been driven by the ‘pull’ of new opportunities that emerge in the towns and cities. A significant number of people who are ‘employed’ according to official statistics could actually have been in ‘disguised unemployment’ in agriculture (consider a person who does no job but occasionally assists his family in cultivation). Young persons in rural areas will be increasingly keen to exit disguised unemployment in agriculture.
As a result of the above-referred factors, there has been a significant increase in India in the supply of potential workers for the non-agricultural sectors. These are 15-59-year-olds who are not students nor engaged in agriculture. If provided the relevant skills, they could possibly work in industry, construction and services. Our estimates show that the potential non-agricultural workforce in India grew at the rate of 14.2 million a year between 2005 and 2012, which rose further to 17.5 million a year between 2012 and 2018.
How has the growth of labour demand matched up to the job challenge in India? Between 2005 and 2012, construction had been the major source of employment in India, absorbing men who exited agriculture in rural areas, especially in Uttar Pradesh, Rajasthan, Bihar and Madhya Pradesh. The growth of construction jobs was associated with a revival in agricultural incomes and rural wages during this period.
Labour demand lagging behind
However, the growth of agricultural incomes and the rural economy in India slowed down markedly after 2012. New employment opportunities in construction created in rural India amounted to 18.9 million between 2005 and 2012, which fell sharply to 1.6 million between 2012 and 2018. The size of the manufacturing workforce in India declined by one million between 2012 and 2018, with micro and small firms in the informal sector suffering severe setbacks. At the same time, some segments of the services sector, especially education and professional, business and allied services recorded acceleration in employment growth after 2012. The crisis in the rural economy appears to have been moderated to some extent by an increase in governmental spending in 2016-18.
Even from 2005 to 2012, job creation in industry, construction and services in India (at the rate of 6.3 million a year) was inadequate to absorb the increase in potential job seekers into these sectors (at the rate of 14.2 million a year). Between 2012 and 2018, while the supply of potential workers into the non-agricultural sectors accelerated (to 17.5 million a year), actual labour absorption into these sectors decelerated (to 4.5 million a year). Thus, the mismatch between potential supply of and demand for labour deepened after 2012. While only the women suffered due to the mismatch during 2005- 2012, young men were also affected after 2012. In fact, 30-59-year-old men managed to secure 90.4% of all new non-agricultural employment opportunities that emerged in India between 2012 and 2018, leaving too few new jobs for women and younger men.
Faced with the inadequate number of new jobs generated in the economy, women withdrew altogether from the labour market. Of all 15-59-year-old women in India, only 23% were employed in 2018, down from 42.8% in 2005. Correspondingly, there had been a sharp rise in the proportion of women who reported their status as attending to domestic duties in their own households. At the same time, the response of young men to the slow job growth in the economy was to continue in the labour market as job seekers. Among 15-29- year-old men, there was an unprecedented increase in the number of the unemployed, from 6.7 million in 2012 to 21.1 million in 2018. This was indeed the main contributor to the sudden increase in overall unemployment in India.
India faces a tough challenge in creating decent jobs for its growing young population. To tackle this, action will be needed on multiple fronts including investments in human capital, revival of the productive sectors, and programmes to stimulate small entrepreneurship. If the country is unable to make effective use of the strengths of its young women and men now, it can perhaps never do so. Within the next two decades or so, India’s population will gradually start getting older, and it will be tragic for millions of poor Indians to grow old before getting even moderately rich.