It is difficult to reconcile the estimates made by the EAC and RBI with those made by the IMF.
The Economic Advisory Council (EAC) and RBI have come out with their forecasts for the country’s GDP growth in recent weeks. They are in the 7/7.5 per cent range, in the EAC’s case for fiscal 2009-10 as well. These numbers are dramatically different from other forecasts. For example, the IMF has recently forecast global growth at just 0.5 per cent (the slowest in 60 years), and 5.1 per cent for India, in 2009. (Calendar 2009 broadly corresponds to fiscal 2009-10.) The Institute of International Finance (IIF), forecasts a similar number. (It also forecasts a collapse of capital flows to the emerging markets to just about $150 billion — a third of the actuals for 2008, and barely a fifth of 2007.) One wonders whether our official forecasters are not being over-optimistic.
A slower growth obviously has great implications for the creation of jobs. As it is, the International Labour Organization (ILO) has forecast the loss of 50 million jobs in 2009, in the worst-case scenario. In a recently released report, it also argues that, in India, the worst hit would be the “working poor” earning less than $2 a day. A drop in growth to 5 per cent would mean lost output of around Rs 200,000 crore, and perhaps 10 million reasonably paying jobs.
The external sector: As for the EAC’s current account forecast, after a deficit of almost 4 per cent of GDP in the first half of the current fiscal, it is projecting a practically zero-deficit in the second half (1.9 per cent of GDP for the year). True, oil and other commodity prices have come down, and traditionally Q4 of the fiscal is much better. Still, such a dramatic change between H1 and H2? For the next year, it forecasts a deficit of just 1 per cent of GDP, banking on continued increase in invisibles. Apart from a slowing global economy, the IT sector will suffer from the repercussions of Satyam. Again, with the drop in oil prices, West Asia is slowing down and Dubai, for example, is cancelling something like 1,500 work permits every day. The prospects for remittances are also not looking very rosy.
Paragraph 40 of the RBI’s quarterly review released last week has a curious comment about short-term trade credit: “That leaves trade credit of the order of $43.2 billion to be repaid during 2008-09. Of this, as much as $28.1 billion has already been disbursed during April-November 2008 leaving a balance of $15.1 billion.” Disbursed — or repaid? As the EAC says, in the “quarter ending December 2008, a substantial reduction of $20 billion may have taken place” (paragraph 38 of the EAC review).
Derivatives Market in India: While the number of new cases of losses in currency derivatives seems to have come down, banks are also now recovering cash margins against even simple forward contracts entered into as hedges. This is quite a change.
The currency futures market started functioning approximately three months back and the two major exchanges seem to be daily trading contracts totalling around $250 million each. While this growth is promising, it will be useful if the authorities (both Sebi and RBI) can consider one change in the product specification. In parallel with the practice in the interbank market in India, the futures contracts mature on the last trading day of the month. Some time back, RBI had tried to persuade banks to change to the global practice, where under-one month forward contracts mature on the same date in the following month, as today’s maturity of a spot transaction. Thus, a one-month maturity forward contract done today would mature on March 4, and not on March 31 as in India.
There is a case for a change in practice in the currency futures market: For major potential end-users, it will be easier if the currency futures contract maturities coincide with the maturities in the commodity futures market. The reason is that, for most positions in commodity futures, there is also a currency exposure. This could be easily hedged in the currency futures market if the maturities are identical.
This apart, in the OTC interest rate derivatives market, trading volumes have dropped dramatically: From Rs 13,000 crore per day in March 2008 to less than Rs 3,000 crore in December. The outstanding transactions have also come down correspondingly, from a gross notional of Rs 85,00,000 crore at the end of March 2008 to (a still sizeable) Rs 52,00,000 crore by end-December. The main reason seems to be the regulatory capital charge. The sooner RBI extends the treatment given to exchange-traded derivatives to CCIL-cleared transactions in both forex forwards and INR interest rate derivatives, the better it will be for a healthy growth of the market!
