In the June / July 2014 issue of Economy Matters, we track the economic developments in the major advanced economies in Global Trends. In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on IIP, Inflation and Monsoon. Additionally, the recent Economic Survey and Railway Budget are also covered. The Sectoral spotlight for this issue is on the Warehousing Industry. In Focus of the Month, the spotlight is on Union Budget 2014-15. Special Feature discusses the importance of Chemical Industry for economic growth.
Text of Economy Matters, June-July 2014
ECONOMY MATTERS 2
JUNE -JULY 20141 FOREWORD Global activity has broadly strengthened and is expected to improve further in 2014-15, with much of the impetus coming from the developed economies. However, the policymakers in these economies need to avoid a premature withdrawal of monetary accommodation. US economy is recovering, albeit a slow pace, consequently the Federal Reserve has vowed to keep interest rates low in order to aid the growth recovery process. European Central Bank (ECB) injected monetary stimulus in June 2014 in order to prevent the economy from fall- ing into deflation trap as sustained low inflation is not conducive for recovery of economic growth. Japans economy is doing well, with the first quarter GDP rising sharply aided by robust growth in domestic demand. Abenomics seems to be doing the trick for the Japanese economy. On the domestic front, deficient monsoons are fast emerging as significant macroeconomic risk. As per the latest data, cumulative rainfall deficiency (till 20th July, 2014) stands at 31 per cent below the LPA. Unless, there is significant recovery in monsoons in the coming weeks, we are at a risk of staring at yet another drought, the fourth in the past decade. In some posi- tive news for the economy, industrial output rose for the second month in a row in May 2014. We expect further rebound in industrial production as the reforms oriented and forward looking budget is expected to boost business confidence, going forward. On the back of the recent measures announced by the government to increase supply of fruits & vegetables in the market, both CPI and WPI inflation moderated in June 2014. However, with the danger of El Nino looming large over the economy this year, a rise in food inflation in the latter part of the year cannot be ruled out. Coming to the most important development of the month of July 2014, in the Union Budget 2014-15, the new government activated a number of directional changes that would stabilize the economy, boost investments, and encourage savings with a view to reviving GDP growth to 7-8 per cent in the near term. Specifically, the budget stood out for its pragmatic and bold approach for initiating measures aimed at reinvigorating the economy. The vision articulated in the budget showed that the government meant business. In this issue of Focus of the Month, sectoral experts discuss the implications of the Union Budget 2014-15 on their respec- tive sectors. Chandrajit Banerjee Director General, CII
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EXECUTIVE SUMMARY ECONOMY MATTERS 4 Global Trends Global economies experienced subdued growth for yet another year in 2013, unable to meet even the modest pro- jections made by many institutional forecasters. Underper- formance in the world economy was observed across almost all regions and major economic groups. Most developed economies continued struggling in an uphill battle against the lingering effects of the financial crisis, grappling in par- ticular with the challenges of taking appropriate fiscal and monetary policy actions. Some signs of improvements have shown up more recently: the Euro Zone has finally come out of a protracted recession. As per IMFs recent Global Eco- nomic Outlook, growth outlook across advanced economies has improved significantly to 2.2 per cent in 2014 as com- pared to 1.3 per cent growth in 2013. This is confirmed by the latest GDP releases across the major economies. Real GDP in US increased to 1.5 per cent on a y-o-y basis in the first quar- ter of 2014 as compared to 1.3 per cent in the corresponding quarter of previous fiscal. In the Euro Area, the GDP growth rate expanded to 0.9 per cent on a y-o-y basis in the first quarter of the current year as compared to contraction to the tune of 1.1 per cent in seen in the first quarter of 2012. Domestic Trends Though the occurrence of normal monsoon is pivotal in supporting the growth rate of the farm sector every year, but this fiscal it assumes greater importance in the context of the macroeconomic challenges facing the economy. As per the latest data, rainfall deficiency for the period from 1 June to 20 July 2014 stood at 31 per cent below LPA as compared to 16 per cent above LPA during the same period last year, even after the gap shrank in the week of 10-17th July, 2014 due to improve- ment in rainfall in some areas of central and northwest India. Unless there is a significant recovery in monsoons in the next few weeks, we would be staring at yet an- other drought, the fourth in the past decade. In some positive news for the economy, continuing its good per- formance of April 2014, industrial production growth rose sharply to 4.7 per cent in May 2014, indicating sig- nals of turnaround of the beleaguered sector. Both CPI and WPI based inflation cooled off in June 2014 on the back of deceleration in food prices and lower base ef- fect of last year. Sector in Focus: Warehousing Industry Warehousing forms a crucial link in the overall logistics value chain. It accounts for close to 5 per cent of the Indian logistics market (excluding inventory carrying costs, which amount to another ~30 per cent). Ware- housing in India has been evolving rapidly from being traditional godowns a mere four-wall-and-shed with sub optimal size, inadequate ventilation and light- ing, lack of racking systems, poor hygiene conditions and lack of inventory management or evolved solutions such as warehouse management systems into modern setups with storage and handling points where raw ma- terial, intermediate and manufactured goods are col- lected, assorted, stored and distributed to the point of consumption/sale. The size of the Indian warehousing industry (across commodities and modes) is pegged at about Rs 560 billion (excluding inventory carrying costs, which amount to another Rs 4,340 billion). The industry is growing at over 10 per cent annually. In this months Sector in Focus, we review this important sector. Focus of the Month: Union Budget 2014-15 The Union Budget 2014-15, the maiden budget of the newly elected government, was announced at a time when the macro-economic milieu continues to be domestically and globally challenging. As a result, the year 2013-14, was pri- marily marked by slowdown in GDP growth and persistent inflationary pressures. The Union Budget 2014-15 stood out for the pragmatic and bold approach adopted by the Finance Minister to lift growth, reignite investment, boost savings and provide a fillip to employment generation. A bold and re- formist budget, it rightly focused on the priority areas which would boost business confidence by providing an impetus to growth. The vision articulated in the Budget showed that the government meant business. In the current issues Focus of the Month, sectoral experts discuss the implica- tions of the Union Budget 2014-15 on their respective sec- tors.
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ECONOMY MATTERS 6 GLOBAL TRENDS Gauging the Economic Performance of Major Developed Economies Global economies experienced subdued growth for yet another year in 2013, unable to meet even the modest projections made by many institutional fore- casters. Underperformance in the world economy was observed across almost all regions and major economic groups. Most developed economies continued strug- gling in an uphill battle against the lingering effects of the financial crisis, grappling in particular with the chal- lenges of taking appropriate fiscal and monetary policy actions. Some signs of improvements have shown up more recently: the Euro Zone has finally come out of a protracted recession, with gross domestic product (GDP) for the region as a whole returning to growth in 2013; a few large emerging economies, including China, seem to have backstopped a further slowdown and are poised to strengthen, going forward. As per IMFs recent Global Economic Outlook, growth outlook across advanced economies has improved sig- nificantly to 2.2 per cent in 2014 as compared to 1.3 per cent growth in 2013. It is further expected to improve to 2.3 per cent in 2015. The uptick in 2014 is primarily due to Euro Area which is expected to return to posi- tive growth rate of 1.2 per cent in 2014 from last two years of contraction in growth. US is the second larg- est contributor (after China) to the somewhat stronger outlook for 2014, where growth is expected to increase sharply from 1.9 per cent in 2013 to 2.8 per cent in 2014. We discuss the economic performance of the major de- veloped economies in the subsequent paragraphs. We are also including China in this discussion, though it is not a developed economy yet, as the economic pros- pects of China are closely intertwined with the perfor- mance of the developed economies. a. United States (US) Real GDP in US moderated to 1.5 per cent on a y-o-y basis in the first quarter of 2014 as compared to 2.6 per cent in the previous quarter. On seasonally-adjusted q-o-q basis, GDP contracted by 2.9 per cent in the first quarter as compared to growth of 1.1 per cent recorded in the same quarter last year. As far as different components of growth are concerned, on a y-o-y basis, positive con- tributions to growth were made by personal consump- tion expenditure, whose growth improved marginally to 2 per cent against a 1.9 per cent in the first quarter of 2013. A severe fall was seen in the growth of residential fixed investment to 2.7 per cent in the first quarter of
7 GLOBAL TRENDS JUNE -JULY 2014 2014 against 12.9 per cent in the comparing period last year. How