Economy Matters, June-July 2014

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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.

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  • 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
  • 3 JUNE -JULY 2014
  • 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.
  • 5 JUNE -JULY 2014 Budget at a Glance 2014-15
  • 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. However, an upturn was seen in growth of non- Coming to inflation, in May 2014, CPI based inflation in US rose marginally to 2.1 per cent as compared to 2.0 per cent in the previous month. However, core inflation (excluding energy and food prices) increased to 2.0 per cent in May 2014, the highest figure since February 2013. Food inflation too accelerated to 2.5 per cent in the re- porting month, its largest 12-month increase since June 2012. The recent upward pressure visible on CPI infla- tion has led to the market talks of possibility of a less dovish Federal Reserve. However, Federal Reserve (Fed) is expected to con- tinue its accommodative stance for 2014-2015. In ac- cordance with the forward monetary policy guidance of the Fed, it is assumed that in the forecasting period of 2014-2015, the federal funds interest rate will remain within the range of 0.0 to 0.25 per cent until mid-2015, followed by a gradual increase starting in the third quar- ter of 2015. The adjustment of long-term assets on the Fed balance sheet has already started last year in De- cember 2013. In its meeting held on June 19th 2014, Fed reduced its asset purchase program from US$45 billion/ residential fixed investment to 3.5 per cent, against 2.4 per cent recorded last year. month to US$35 billion/month. Component wise, Fed would trim its purchases of long-term Treasury bonds to US$20 billion/month (from US$25 billion previously) and mortgage-backed securities (MBS) to US$15 billion/ month (from US$20 billion). QE3 is expected to be ter- minated in fourth quarter of 2014. b. Euro Area 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 cur- rent year as compared to 0.5 per cent in the previous quarter and contraction to the tune of 1.1 per cent in seen in the same quarter of 2012. Amongst the various sectors of GDP, the growth of household final consump- tion expenditure and government final consumption expenditure increased to 0.4 per cent and 0.2 per cent respectively in the reporting quarter, as compared to contraction to the tune of 1.2 per cent and 0.6 per cent respectively recorded in the same quarter last year. Growth in gross fixed capital formation improved to 1.9 per cent in the reporting quarter, as against a decline of 5.5 per cent in the same period last year.
  • ECONOMY MATTERS 8 GLOBAL TRENDS The growth trends among individual countries in the Euro Area were varied (see below table). Among mem- ber states for which data are available for the first quarter of 2014, Hungary (3.2 per cent), Poland (3.5 per In Euro Area, CPI inflation moderated to 0.5 per cent in May 2014 from 0.7 per cent in April. The largest upward impact to inflation came from tobacco, restaurants & cafs, and electricity, while vegetables, telecommunica- tions and fruit had the biggest downward impact. The European Central Bank (ECB) is assumed not to cut its policy interest rates further, but to keep policy rates at the current levels through the end of 2015, followed cent), Romania (3.8 per cent) and the United Kingdom (3.1 per cent) recorded the highest growth on a year- on-year basis. Estonia (-1.5 per cent), Cyprus (-4.1 per cent) and Finland (-0.8 per cent) registered the largest decreases. by a gradual path of increases. The outright monetary transaction programme will remain in place and refi- nancing operations will continue to meet the needs of the banking sector. Additionally, ECB unveiled a number of monetary easing measures ranging from lower policy rates to targeted Long Term Refinance Operations (TL- TROs) to extension of fixed-rate full-allotment tender procedures without any time limit in its meeting held in first week of June 2014.
  • 9 GLOBAL TRENDS JUNE -JULY 2014 c. Japan In the Asian continent, Japan saw its GDP growth accel- erated to 3 per cent on a y-o-y basis in the first quarter of 2014 as per Cabinet Office, Japan, as compared with growth of 2.5 per cent in the previous quarter and 0.1 per cent in the same period last year. The upswing in GDP was aided by robust growth in domestic demand The CPI based annual inflation accelerated to 3.7 per cent in May 2014 from 3.4 per cent in April, as the ef- fects of a sales tax increase continued to push consum- er prices up. Further upward push to CPI inflation was provided by increase in prices of fuel, light and water charges and furniture and household utensils. The Bank of Japan (BoJ) is assumed to continue its Quantitative and Qualitative Monetary Easing Pro- gramme as it was originally designed until the end of 2014. To be sure, BoJ has set a goal of an annual increase in the monetary base of between 60 trillion yen and 70 trillion yen ($690 billion) in order to ensure that inflation picks up to its 2 per cent target. The policy rate for BoJ is also assumed to stay within the range of 0.0 to 0.1 per cent through the end of 2015, to accommodate the sec- drivers....