Last week, in its third bimonthly monetary policy statement, the Reserve Bank of India (RBI) briefly commented on the global economic environment, without indicating any action points for reversing the declining trend in exports.
RBI said global economic activity recovered modestly in the second quarter of calendar 2015. The US economy rebounded on stronger consumption growth and steadily improving labour market conditions, though recent wage data suggest continuing slack. The euro area had grown at a moderate pace through the first half of 2015, supported by consumer spending, easing financing conditions and a modest downturn in still-high unemployment.
In Japan, growth slowed in the second quarter after an upside surprise in the first one. In emerging market economies (EME), activity decelerated through the first half of this year due to headwinds from weak external demand, tightening external financing conditions, deteriorating structural bottlenecks and spillovers from unsettled conditions in financial markets.
Recessionary conditions persist in Russia and Brazil, with downside risks from commodity prices and geopolitical developments casting a shadow on the outlook, including for other EMEs. Global growth projections for 2015 have generally been revised downwards and, therefore, the export contraction could become a prolonged drag on it.
To be fair, RBI has been sterilising the foreign exchange inflows of dollars, to ensure the rupee does not appreciate much. In fact, it has ensured a marginal fall in rupee value against the dollar with timely interventions. The rupee has fallen from Rs 61 to a US dollar last August to Rs 64 to a US dollar now. But during the same period, the rupee has appreciated from 83 per euro to 71 per euro.
RBI can do more. Raghuram Rajan, present governor of RBI, was member of an inter-ministerial committee for boosting exports from micro, small and medium enterprises (MSME) in his capacity as chief economic advisor to the central government. To reduce the cost of credit, the committee had recommended an additional two per cent interest subvention to MSME exporters which repaid on time, a separate sub-limit of, say, eight per cent for credit to MSME exporters within the overall priority sector limit, provision of interest subvention to all exporters promptly, reduction of the maximum interest rate to two per cent over Libor for export credit in foreign currency, automatic increases in credit limits, earmarking 50 per cent for MSMEs under the swap facility scheme, keeping 40 per cent of export credit for MSMEs (in proportion to their share in India's total exports), inclusion of 'export credit to MSMEs' as an eligible sector for deployment of half of the respective bank's shortfall in priority sector lending and so on. On September 25, 2013, the RBI issued some instructions giving more flexibility, but most of these and many other recommendations of the committee have been ignored.
Export growth continues to be in negative territory since November. The overall perception is that the commerce ministry is clueless on how to revive exports but RBI knows what needs to be done but is reluctant to act.
email: tncrajagopalan@gmail.com
RBI said global economic activity recovered modestly in the second quarter of calendar 2015. The US economy rebounded on stronger consumption growth and steadily improving labour market conditions, though recent wage data suggest continuing slack. The euro area had grown at a moderate pace through the first half of 2015, supported by consumer spending, easing financing conditions and a modest downturn in still-high unemployment.
In Japan, growth slowed in the second quarter after an upside surprise in the first one. In emerging market economies (EME), activity decelerated through the first half of this year due to headwinds from weak external demand, tightening external financing conditions, deteriorating structural bottlenecks and spillovers from unsettled conditions in financial markets.
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Despite aggressive policy stimuli, the Chinese economy is slowing on macro economic re-balancing, sizeable stock market corrections, a cooling property market and excess capacity in several manufacturing industries.
Recessionary conditions persist in Russia and Brazil, with downside risks from commodity prices and geopolitical developments casting a shadow on the outlook, including for other EMEs. Global growth projections for 2015 have generally been revised downwards and, therefore, the export contraction could become a prolonged drag on it.
To be fair, RBI has been sterilising the foreign exchange inflows of dollars, to ensure the rupee does not appreciate much. In fact, it has ensured a marginal fall in rupee value against the dollar with timely interventions. The rupee has fallen from Rs 61 to a US dollar last August to Rs 64 to a US dollar now. But during the same period, the rupee has appreciated from 83 per euro to 71 per euro.
RBI can do more. Raghuram Rajan, present governor of RBI, was member of an inter-ministerial committee for boosting exports from micro, small and medium enterprises (MSME) in his capacity as chief economic advisor to the central government. To reduce the cost of credit, the committee had recommended an additional two per cent interest subvention to MSME exporters which repaid on time, a separate sub-limit of, say, eight per cent for credit to MSME exporters within the overall priority sector limit, provision of interest subvention to all exporters promptly, reduction of the maximum interest rate to two per cent over Libor for export credit in foreign currency, automatic increases in credit limits, earmarking 50 per cent for MSMEs under the swap facility scheme, keeping 40 per cent of export credit for MSMEs (in proportion to their share in India's total exports), inclusion of 'export credit to MSMEs' as an eligible sector for deployment of half of the respective bank's shortfall in priority sector lending and so on. On September 25, 2013, the RBI issued some instructions giving more flexibility, but most of these and many other recommendations of the committee have been ignored.
Export growth continues to be in negative territory since November. The overall perception is that the commerce ministry is clueless on how to revive exports but RBI knows what needs to be done but is reluctant to act.
email: tncrajagopalan@gmail.com