European and the US crises is hitting the Indian economy. What is touted as shrinking trade deficit is a grim reality of fall in exports and imports remaining higher. The prospective rise in the US debt ceiling beyond $31.4 trillion or the lack of it could cause turmoil in the world economy even as Europe is to come out of a tough low sale regime. This hits the pattern of global demand and can lower Indian sales in the developed markets as well as might impact manufacturing and the overall growth.

Corresponding fall in wholesale and retail price indices though look positive, these still have to materialise in a low-price regime because of compounding effect of higher-than-normal inflation for a prolonged period. The silver line that the industry expects is to have a pause again of interest rate hike by the Reserve Bank of India. Conversely it affects interest accruals (not earnings) to bank depositors.

That has a critical impact on the market owing to low purchasing capability. Artificial modes have practical problems. Banks have been in continuous problem for over a decade. And, if this is ignored again, the cascading effect may not be easy to correct.

Presenting the positive of the trade balance, Director General of Foreign Trade Santosh Sarangi noted that it was at a 20-month low at $15.2 billion in April. It’s less to cheer up and is not due to fall in imports but fall in exports. This translated into higher inward goods movement and less external sales or exports.

The commerce minister revised the trade data of 2022-23. Exports, goods and services is estimated to have increased 14.7 percent to $775.9 billion, around $6 billion higher than the earlier estimates. Imports were around $894.9 billion, 17.7 percent higher resulting in a trade deficit of $118.3 billion.

The government is drawing comfort from the services export numbers. During April, services exports were $30.4 billion, 26 percent rise. Imports at $16.5 billion rise by 17.7 percent. Sarangi does not give much solace. His prognosis is a pointer to the impending crisis that may be developing shortly.

The WPI slipping to 0.9 percent year on year gives less of hope. While agricultural input costs have not come down, the sales are drawing abysmal rates. This has hit the farmers as sale prices dipped by -18.7 percent for potato, -18,4 for onion, -15,5 percent for oilseeds and non-food items by -6,6 percent.

While this could be construed as relief for the consumers, though the benefits are far less than the losses to the farmers, in effect it’s none virtually. This extends to all other products such as fruits and manufactured items. While statistically it brushes up presentations, in actuality the losses to rural economy are high and relief to consumers mere rhetoric.

Not surprising, Sarangi strikes the right chord. He says, “For the next two-three months demand scenario does not look very optimistic, Things may change September onwards. There is a possibility that the opening up of the Chinese economy, combined with some boost to demand in Europe and the US from August-September might give a boost to global exports”. Statistical management of prices are fine for records, but it helps none except confusing assessments. There was a time when the Planning Commission used to come out with realistic presentations. Now it’s passe.

The nation is too euphoric at telling how high the GST collections are. The April collections are said to be record, as most of the past few collections have been breaking their own records. India’s gross GST revenues hit a record high in April at Rs.1,87,035 crore, 12 percent higher than the same month last year, which had clocked the previous highest tax tally of Rs.1.67 lakh crore. The GST is irrational in many ways.

The latest is the RBI directions on penal interest charges. The Finance Industry Development Council has reacted sharply, saying that these risks levying GST on penal charges – i.e. tax-on-tax and convolute the basis tax principals. This could have a deleterious effect on all transactions, forcing a rise in unprecedented prices.

The GST itself needs to be redone and the States be given the charge to collect it. It has impacted the federal character of the country. Similar systems lead to multiple taxation, which even GST, being an assimilation of a few taxes, is. It is an important component in deciding prices.

With the abolition of Monopolies Commission, fixing MRPs has virtually no basis. It does not represent the cost of the product. The MRPs often are fixed at 20-30 percent higher than the actual leading a system of built-in undercutting by the larger companies.

We have, however, not benefitted so much from the ‘Make in India’ campaign for import substitution and exports promotion, notes Madan Sabnavis, Chief Economist of Bank of Baroda. A recession in the West would also mean that the demand for Indian labour as well as computer related services would come down. These could affect our balance of payments.

At the other end, external commercial borrowings (ECBs) and NRI deposits too will get impacted depending on the policy of interest rates, especially in the West. Rising rates in the US would make ECBs dearer and impact fund flow to India.

The ratio of exports to GDP has come down over time. This is both good and bad news, says Sabnavis. The good part is that it shows growth is primarily driven by domestic factors and hence decline in exports does not affect GDP growth significantly. So, growth projections are high for next year, at 6-6.5 per cent. The concern being Indian goods are less in demand.

The moot point is that the US sanctions on China and Russia in the wake of the Ukraine war has not helped India capturing those spaces. The dream to be an economy with significant contributions from exports, one important aspect to be a global power, has not been fulfilled.

This means that if exports grow these would support the domestic economy, but in itself, India is not an export-led economy. This gives some resilience to the economy as also creates the issue of having robust foreign reserves.

New strategisation through moderation of several domestic taxes, interest rates and low cost on transportation is a necessity. Exports cannot be increased with high domestic costs as prices would be prohibitive. Calculated planning is critical.—INFA

(The writer is former senior editor, The Financial Express and Professor, Indian Institute of Mass Communication.)