Economy Matters, November-December 2013

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Euro Area is recovering slowly, with its major member countries registering lower-than-expected growth rates in the third quarter. Major Asian economies have shown diverse growth trends in the last few quarters. We cover this in the section on Global Trends in this month’s issue of Economy Matters. In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on GDP, Current Account, IIP and Inflation data during the month of December 2013. The Sectoral spotlight for this issue is on Electricity, which remains an important contributor to GDP growth. We evaluate the impact of the Electricity Act, 2003 on the sector’s performance. In the Special Article, we provide a snapshot of India’s exports sector along with analyzing the important sectors in exports such as services and tourism.

Text of Economy Matters, November-December 2013

December issue-1

ECONOMY MATTERSVolume 01 No. 11November-December 2013

Rejuvenating ExportsCover Story

- Euro Area's Economic Recovery

Falters in the Third Quarter

Inside This Issue - Asian Economies: A 'Mixed Bag' as far as Growth is Concerned

- Cautious Optimism on Growth and

Current Account

- GST is Inevitable; - But Only After

Next General Elections!

- Sector in Focus: Electricity

Euro Area is recovering slowly, with its major member countries registering slower-

than-expected growth rates in the third quarter. Real GDP grew by 0.1 per cent in Q3

2013, moderation from the 0.3 per cent growth seen in the previous quarter. With this, in

the three quarter of this fiscal so far, Euro Area's GDP has contracted by 0.7 per cent as

against decline of 0.5 per cent in the corresponding period last year. As per the new set

of data on the PMI indices, some rebound in growth is perceptible; however, weak retail

sales data is keeping the currency bloc's growth outlook under pressure. Moving over

to the Asian continent, the major economies are growing at varied pace, with Indonesia

and Malaysia notching up impressive set of GDP numbers in the third quarter. Singapore

economy also did well in the July-September quarter, while Thailand, Hong Kong and

Japan remained the laggards. The growth outlook in these Asian economies remains

contingent on the strength of the recovery in US, Euro Area and China going forward.

Domestically, growth seems to have bottomed out. Two crucial macroeconomic

parameters were released in November 2013, which have infused some enthusiasm

amongst the economy watchers. GDP growth increased to 4.8 per cent in the second

quarter of the fiscal from 4.4 per cent in the previous quarter and current account deficit

(CAD) fell sharply to 1.2 per cent of GDP from a high of 5.0 per cent in the quarter before.

However, these set of feel-good data prints should be taken with a pinch of salt as the

GDP growth still remains below 5 per cent and more importantly, the drivers needed to

push it beyond that threshold are not visible. CAD compression also is largely due to the

artificial controls on curtailing gold imports. To make the recovery more resilient,

concerted action on the front of the policy makers is the need of the hour in terms of

speedy implementation of projects, removing of structural bottle-necks etc.

The improving global macroeconomic environment and a weaker rupee have given a

fillip to India's exports, which rose by 12.2 per cent during the second quarter of the

current fiscal. This strong growth in exports coupled with muted imports has had a

favorable impact on the CAD. In the next 12-18-months, export performance will not

only influence the CAD but will also be one of the factors supporting GDP growth

because the domestic economy and investment cycle will improve only gradually. The

services sector has been a key driver of India's improved trade performance and there is

a potential for increasing its exports further given the fact that India is a leading player in

the services trade in the world.

Chandrajit Banerjee

Director-General, CII

1

FOREWORD

NOVEMBER - DECEMBER 2013

Euro Area is recovering slowly, with its major member countries registering slower-

than-expected growth rates in the third quarter. Real GDP grew by 0.1 per cent in Q3

2013, moderation from the 0.3 per cent growth seen in the previous quarter. With this, in

the three quarter of this fiscal so far, Euro Area's GDP has contracted by 0.7 per cent as

against decline of 0.5 per cent in the corresponding period last year. As per the new set

of data on the PMI indices, some rebound in growth is perceptible; however, weak retail

sales data is keeping the currency bloc's growth outlook under pressure. Moving over

to the Asian continent, the major economies are growing at varied pace, with Indonesia

and Malaysia notching up impressive set of GDP numbers in the third quarter. Singapore

economy also did well in the July-September quarter, while Thailand, Hong Kong and

Japan remained the laggards. The growth outlook in these Asian economies remains

contingent on the strength of the recovery in US, Euro Area and China going forward.

Domestically, growth seems to have bottomed out. Two crucial macroeconomic

parameters were released in November 2013, which have infused some enthusiasm

amongst the economy watchers. GDP growth increased to 4.8 per cent in the second

quarter of the fiscal from 4.4 per cent in the previous quarter and current account deficit

(CAD) fell sharply to 1.2 per cent of GDP from a high of 5.0 per cent in the quarter before.

However, these set of feel-good data prints should be taken with a pinch of salt as the

GDP growth still remains below 5 per cent and more importantly, the drivers needed to

push it beyond that threshold are not visible. CAD compression also is largely due to the

artificial controls on curtailing gold imports. To make the recovery more resilient,

concerted action on the front of the policy makers is the need of the hour in terms of

speedy implementation of projects, removing of structural bottle-necks etc.

The improving global macroeconomic environment and a weaker rupee have given a

fillip to India's exports, which rose by 12.2 per cent during the second quarter of the

current fiscal. This strong growth in exports coupled with muted imports has had a

favorable impact on the CAD. In the next 12-18-months, export performance will not

only influence the CAD but will also be one of the factors supporting GDP growth

because the domestic economy and investment cycle will improve only gradually. The

services sector has been a key driver of India's improved trade performance and there is

a potential for increasing its exports further given the fact that India is a leading player in

the services trade in the world.

Chandrajit Banerjee

Director-General, CII

1

FOREWORD

NOVEMBER - DECEMBER 2013

Global Trends

Domestic Trends

The 17-nation Euro Area (EA) eked out marginal

economic growth in the third quarter of the current

year (Q3 2013), indicating that while the single currency

bloc is sustaining a very modest recovery, it's

struggling to gain momentum. Although the PMI

indices for October and November have been better

than in Q3 2013, unexpected fall in retail sales in

October continues to keep EA GDP under pressure.

Coming to the Asian continent, countries across Asia

have been hit by falling exports, dragging on growth

and pushing current account balances into the red. At

the same time, capital has flowed out of the region

amid rising U.S. interest rates as investors anticipated

an end to the U.S. Federal Reserve's massive bond-

buying program. That has compounded pressures on

Asian currencies, making it harder for the region's

central banks to loosen monetary policy to support

growth.

The data on India's current account deficit (CAD) and

GDP released over the last one month has injected a

dose of mild optimism among policymakers and

market analysts. GDP growth marginally lifted to 4.8

per cent in the April-September quarter from 4.4 per

cent in the preceding quarter and CAD fell to 1.2 per

cent of GDP from 5.0 per cent in the previous quarter.

However, industrial production number of October

2013 once again disappointed, as the headline number

slipped into the negative territory. The decline in IIP

during the month was underpinned by contraction in

many of its sub-sectors such as manufacturing, mining,

basic and consumer goods. In contrast, WPI inflation

accelerated to more than one year high of 7.5 per cent

in November 2013 as compared to 7.0 per cent in the

previous month on the back of increase in food and

fuel inflation. To be sure, consumer prices based

inflation (CPI) too quickened to 11.2 per cent in October

2013 from 10.1 per cent in the previous month.

However, citing the transitory nature of food prices

and high probability of them receding in the

subsequent months, RBI kept the policy rates

unchanged in its mid-December policy review.

Sector in Focus: Electricity

Special Article

Electricity sector is an important contributor to the

economic growth of the country. However, in the last

year, the sector's growth halved to 4.0 per cent as

compared to 8.2 in 2011-12. In order to make the sector

more efficient, promote its development and

consolidate laws relating to generation, transmission,

distribution, trading and use of electricity, government th

had brought into effect the Electricity Act on 10 June

2003. With the Act now 10 years old, the sector has

come full circle - from emerging as one of the most

attractive investment destinations in the late 2000s,

private investment has since receded. An assessment

of the last 10 years of the Act reveals that while the