Fuel growth with domestic demand

Jayshree Sengupta

THE economy needs steps for revival as the fourth quarter results of Indian companies in 2014-15 have not been encouraging. A spurt in domestic demand can prove to be the most important impetus for growth of the Indian economy in 2015-16. Then India will not have to be reliant entirely on export-led growth. Boosting domestic demand is the strategy which China is also trying to follow because though its export-led growth strategy has led to rapid trade expansion, it has also increased its dependence on the global economic forces which are beyond its control. 

In the 1960s and 70s, the entire South East Asia based its growth model on export-led growth strategies. All countries (today’s ASEAN) were interested in growing by promoting manufactured exports based on cheap labour costs. Japan was the leader in export-led growth and as it graduated to more capital-intensive sophisticated-manufactured goods’ production, it left space for others to manufacture simpler labour-intensive products. This well-known ‘flying geese’ pattern of industrialisation based on dynamic comparative advantage is now becoming less and less popular as the global economy’s capacity to absorb goods from the developing countries is diminishing.

The slump in global demand is a new and difficult phenomenon which the emerging countries are facing and the quicker they wean themselves from dependence on developed countries the better. Regional blocs are becoming more important and intra-regional trade is now taking precedence over global trade.

India is fortunate to have a huge market base of consumers whose appetite for goods, especially in gold, is phenomenal. India keeps importing tonnes of gold every year. It also has to import 80 per cent of its oil needs. India also imports crude oil for refining purposes and petroleum products are a major export earner. 

The outlook for exports in 2015-16 is not good and according to the CMIE, for the second consecutive year, exports will decline by 2.3 per cent to touch a three-year low of $301.89 billion. By contrast, exports grew between 2002-03 and 2011-12 by 21.4 per cent per annum.

The main reason for the fall in export growth is the fall in petroleum product prices. As a result, petrol product exports will fall by 24.5 per cent. Oil prices have fallen in 2014-15 due to global supply glut and weak demand. 

The main buyers of India’s petroleum products are the EU and the US. While the EU will grow only at 1.5 per cent, the US is slated to grow faster at 2.5 per cent in 2015-16. China is also going to slow down and its imports of petroleum products from India will be lower.

India’s non-petroleum product imports are likely to rise by 7.1 per cent, though there is an expected slower growth in gold imports. Growth of gold imports is expected to go up by 7.9 per cent to $337.19 billion in 2017. 

Gold prices are likely to remain weak as the dollar’s value strengthens in 2015-16. Due to the fall in the price of gold and oil at the same time, the merchandise trade deficit is expected to decline by 2.5 per cent and as a proportion of the GDP, it is expected to decline to a 12-year low of 6.2 per cent. 

Usually, a fall in export growth means slowdown in manufacturing growth. But the good news is that domestic demand is rising and the loss on the export front will be made up by increase in urban demand which will lead to an accelerated rate of industrial growth.

Falling inflation, gold prices and petrol prices have boosted the consumer confidence in urban India. In March 2015, RBI’s consumer confidence survey, based on a sample of 54,000 households, revealed that 78.3 per cent of respondents said in March 2015 that they were going to increase their spending levels in 2015-16. More than half said they expected their economic conditions to improve. In rural India, it is still not clear whether there will be a monsoon deficit. Thus rural demand will remain uncertain.

Modi’s dream of ‘Make in India’ may thus come true if the reported an increase in demand is matched by increase in investment. Lending rates have come down and hence it will act as a stimulus for undertaking fresh investment, but on the whole, the RBI will follow a cautious policy in order to control inflation. 

Manufacturing activity is likely to improve as a result, thus pushing up industrial growth to 4.1 per cent in 2015-16 as compared to 2.3 per cent in 2014-15. There will be increase in demand for cement, steel, copper and iron because of more infrastructural building. Basic metals and other non-metallic minerals are also slated to benefit. 

Mining activity is supposed to get an impetus this year and grow at 3.1 per cent. All this has to be supported by an addition to capital expenditure of Rs 71.8 billion. There will also be more production of oil and gas and nuclear power.

China switched strategies of powering its growth through export expansion because it learnt the hard lesson that rapid growth leads to increasing amounts of environmental pollution. There is likely to be a stimulus package to boost domestic demand as the government is keen to raise the standard of living of Chinese people. Growth fuelled by domestic demand is much more sustainable and can be more environmental friendly.

India also has to solve its pollution problem in big cities as vehicular traffic increases. The demand for cars is expected to rise further in 2015-16. Thus big cities’ infrastructure has to be improved to prevent increasing amounts of traffic congestion, which is getting to be an immense problem for commuters in big cities.

Along with investment in physical infrastructure, there has to be a higher central government expenditure on health and quality of education to combat the problem of inadequate healthcare and youth unemployment. The ‘reforms’ have to be aimed at making India’s youth employable and making people more healthy through provision of clean drinking water and good quality air, and not necessarily in the further opening up of the economy.