A steadily growing India Inc. and what it means for a sluggish economy

Rising corporate profitability and declining wages definitely mean economic power is shifting in favour of capital away from labour

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Sudip Bhattacharyya | January 16, 2014



As per Reserve Bank of India (RBI), every ten percent depreciation of the rupee adds 120 basis points to inflation. This is because higher import costs are passed on to consumers and increase in fuel prices leads to higher fiscal deficit to the extent the government absorbs part of the increase. This was a major concern when the rupee had a drastic fall last year and high inflation persisted. The government and RBI took several measures on import control and foreign exchange management and were able to stabilise the rupee. Further international trade performance improved. As on November 13 last year, there was a 13.5 percent rise in dollar exports as compared to October 2012 and imports fell by 14.5 percent during the same period which led to decline in trade deficit by 48 percent. The current account deficit (CAD) this fiscal is estimated to be $56 billion (i.e. $32bn lower from last fiscal) which is less than 3 percent of GDP. CAD in Q2 was 1.2 percent of GDP and it is expected to further decline to 1.1 percent in the third quarter. It is down from its highest ever of 6.7 percent in the third quarter of 2012 due to  restrictions on gold imports, which accounted for nearly half the CAD, and a surge in exports following signs of recovery shown by the other countries. Export growth, however, has fallen in December to 3.49 percent, touching a six month low.

Also, after the consistent outflow of net foreign exchange between June and November, the last month of December saw an inflow of foreign exchange. With hot money having already exited the country, the balance foreign fund appears to be stable despite the $10 billion tapering of quantitative easing by the US Fed. India should also be able to withstand stronger future tapering by the Fed.

Meanwhile, feeding the high current account deficit through capital flows, especially including higher borrowings by Indian corporate houses, may begin to bite eventually. India's total overseas debt stands at 136 percent of the foreign exchange reserves as of June-end 2013 and went up by 4 percent in September. The US dollar denominated debt is 60.7 percent of which short-term debt maturing within the next 12 months stands at $96 billion. Thus, its repayment may considerably impact the country’s CAD.

Although economic growth has marginally risen to 4.8 percent in the second quarter from 4.4 percent in the previous one, the acceleration of inflation in the last few months has frustrated policymakers' efforts to further it.

While October's index of industrial production (IIP) rose by 2 percent year-on-year, the consumer price index, mostly driven by food prices, rose by an alarming 10.09 percent. The reading for October headline inflation was subsequently revised to 7.24 percent from 7 percent.

Further, energy costs were up 10.33 percent year-on-year, a marginal increase from 10 percent in the previous month. Also, prices of manufactured goods accelerated by 2.5 percent, up from 2 percent in September. In November, wholesale prices, the country's main inflation measure, rose 7.52 percent, the highest in 14 months.

Headline inflation eased to a five-month low of 6.16 percent in December from a 14-month high, helped by a softening in vegetable prices. Food prices rose 13.68 percent year-on-year last month, much slower than an annual rise of 19.93 percent in November. Cooling in food prices slowed down retail inflation to a three-month low of 9.87 percent in December. Thus, inflation continues despite this very recent decline and RBI cannot be expected to ease interest rate to accelerate growth. The dilemma persists.

Yet, India Inc. is poised to see acceleration in growth up to 25 percent in 2013-14 from an expected 14.5 percent in 2012-13, a think-tank said. “Softening input prices, appreciation of the rupee and consequent absence of foreign exchange losses are expected to boost profitability,” the Center for Monitoring Indian Economy (CMIE) said in its monthly review. International prices of crude oil are expected to fall by 2.9 percent in 2013. This coupled with a 4.1 percent appreciation in the Indian rupee is expected to bring down the cost of crude oil imports substantially, the report said. The petroleum products sector is expected to be the major beneficiary of this. The partial deregulation of diesel prices announced earlier this month is expected to reduce the reliance of the sector on subsidies and aid its bottom-line, the report further said.

The ILO recently produced their growth and wages report for 2012-13. The report suggested that across the developing world, labour markets are being characterised by falling real wages and a decline in labour’s share of national income. Workers in many developing countries, from China to Mexico, have also struggled to seize the benefits of growth over the past two decades. A greater reliance on imports is found to lead to further decline in labour’s stake. The likeliest culprit is technology, according to the OECD estimates, which accounts for roughly 80 percent of the drop in the labour share among its members. Foxconn, for example, says it will add one million robots to its factories next year. Research showed in America that rises in profit margins is linked to the sluggish growth of unit labour costs.

Thus corporate profitability is rising and wages falling notwithstanding increasing inflation. While it may or may not lead to increasing investment and consequently more growth in India, it definitely means economic power is shifting in favour of capital away from labour.

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