With the publication of the LSM data for the month of June the full picture of the last year's performance has emerged. The production has declined by 3.64% during FY19, which is the poorest showing in last 10 years. All major sub-sectors like automobiles, iron and steels, food & beverages, petroleum products, pharmaceuticals and cement were significantly down. The data on industrial production means the revised growth of 3.3% was overestimated and more likely the growth last year was more in the range of 2.5-2.7%
As far as the evolution of economic picture for the current fiscal year is concerned, there are mixed results. More information is available regarding the month of July. We have already reviewed the revenue performance, which was not inspiring. Arguably, the inflation was not a runaway story. The food component played greater role, which is seasonal as well as supply constraints during the rainy season. The impact of budgetary measures also played a role.
The most significant data that the market was waiting for was the balance of payment (BoP), which was finally released a few days ago. From the point of view of containing the current account deficit (CAD), this is undoubtedly a fairly good news. The CAD has come down by a huge 73% from $ 2.1 billion to just $ 579 million. Not surprisingly, the trade account has led the recovery which declined by nearly half from $ 3,485 million to $ 1,847 million. The improvement in trade account could not have been more wholesome. Exports rose by 11% from $ 2,012 million to $ 2,233 million while imports declined by 25% from $ 5,497 million to $4080 million.
The remittances growth, on the other hand, has slowed. As against a handsome growth of 10% registered in FY19, the growth in July was only 3%. Clearly, with a high base, further growth would be difficult to achieve.
As far as the capital movements are concerned, the FDI has slipped 59% relative to last July. This is indicative of an uphill task the government faces in bringing foreign capital in the country. The trend in FDI throughout FY19 has been declining, which is indicative of the fact that the flows represented only pipeline investments which are fading.
In comparison to the Fund programme, the BoP results are primarily in line. On a pro-rata basis, the Fund had projected a CAD of $ 557 million, which is very close to the actual. While exports were in line, the imports were down more than the IMF projection. However, the remittances were higher than IMF projection and therefore the overall CAD was near the Fund projection.
While this is a celebratory outcome, we have to be cautious. First, this is only the first month of the fiscal year and we have a long way to go. How the full year would evolve cannot be predicted at this stage. Exports are still vulnerable for the simple reason that a new tax regime has been announced withdrawing many facilities applicable to the export sectors. The impact of those measures would only emerge going forward.
Second, and more importantly, the steep decline in imports would have major impact on domestic production and investment. The economic slow-down that engulfed the country last year would remain with us longer than one may have thought. The production of automobiles in the month of July declined by 42%. There are now issues of demand which is missing as disposable incomes are plummeting and inventories are rising. This would have adverse effect on prices which in turn would discourage investment, particularly in view of high interest rates, and the cycle of low growth and low prices, classical recessionary conditions, would repeat itself.
The turnaround in the stock market is perhaps the most important development, which may bode well for the economy. Given the fact that this has happened without a notable change in economic fundamentals, is a testimony that some non-economic factor is responsible that has given new hopes to investors. Analysts believe that the extension in the term of office of the Army Chief is the catalyst that has inspired market's confidence. In an environment completely bereft of any hope and inspiration, an event that signals political stability is indeed a source of considerable strength. However, to expect that this would sustain at its own the momentum of the market would be unrealistic. The fundamentals of the economy have to be put right to expect a sustained recovery of the market.
Another positive development are the reports regarding the recommendations of the PM's committee on institutional reforms, based on its assessment that bureaucracy is reluctant to take decisions for fears of accountability, and the need to insulate them against arbitrary actions, and cabinet's discussion on the larger subject and its consequences on business sentiments. Briefing the media persons after the cabinet meeting, the special assistant to PM said: "In the light of complaints of business community against NAB, the federal cabinet discussed how the practice of arm-twisting and threatening of businessmen by some NAB officials can be thwarted."
The cabinet reportedly observed that businessmen are afraid of NAB. They are neither investing their money nor depositing it in banks. In fact, they are hiding their cash under their mattresses. The federal cabinet also observed that business activities had stopped and the economy had crippled due to the fear of NAB. It has been informed in a series of meetings, chaired by the prime minister, that local and foreign investment has come to a halt and bureaucrats are not signing files and have stopped decision making due to the fear of NAB. The following day, the Law Minister, at a press conference, laid out more concrete proposals with respect to amendments to the NAB law.
For a government that was constantly in denial that such conditions exist on the ground, the above cabinet observations are a massive change of heart. We welcome it, as we have been advocating that a congenial environment is essential for successfully facing the economic challenges. Despite being mixed, we feel, overall, the environment is changing in the right direction. It is imperative that this is consolidated and given a momentum that would be self-sustaining.
(The writer is former finance secretary)
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