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Subject: Economics

  • Finmin lifts bar on CPSUs issuing Letters of Comfort

    comfort

    Central idea: The Finance Ministry has allowed central public sector firms (CPSUs) to issue letters of comfort with a condition that they should clearly state that the Government of India will not be liable for any consequences arising from such letters.

    What is a Letter of Comfort?

    • A letter of comfort is a support document issued to a borrower that adds some strength to the transaction when giving loans.
    • Letter of comforts are usually issued by a third party or a stakeholder in the transaction.
    • For instance, a holding company can give a letter of comfort on behalf of its subsidiary or a government can issue a letter of comfort for public sector enterprises.
    • The letter of comfort can also be issued by banks, NBFCs and auditors.

    Obligation status of LoCs

    • The letter of comfort is not legally binding or an obligation by the holding company to repay the loans.
    • It is just an assurance to the lender that the holding company is aware of the transaction, the policies of the subsidiary and its intentions in seeking a loan.
    • This provides some comfort to the financial institution to lend money for short term or long term.
    • One can say that the letter of comfort could become a moral obligation and not a legal one.

    How is it different from letter of guarantee?

    • A letter of comfort is different from a letter of guarantee.
    • As spelled out in the name, the letter of guarantee acts as a commitment to the lender that the issuing company is taking responsibility for the repayment.
    • It is also legally binding and the transaction becomes an obligation for the guarantor.
    • Holding companies usually give letters of comfort when they are unable or unwilling to give letters of guarantees.

    Try this MCQ-

    Q. Which of the following statements is true about a Letter of Comfort?

    A) It is a legally binding document that obligates the holding company to repay the loan.

    B) It is issued only by banks and NBFCs.

    C) It is an assurance provided by a third party to the lender that adds strength to the transaction when giving loans.

    D) It is the same as a Letter of Guarantee in terms of its legal obligations.

     

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  • Latest Trade Data : India’s Merchandise Exports and Imports

    Central Idea

    • The Ministry of Commerce and Industry has released the latest trade data that shows a continued contraction in India’s merchandise exports and imports in February. It indicates a slowdown in both the global and domestic economies.

    Overview

    • The pace of contraction has deepened, and this has resulted in a further narrowing of the country’s merchandise trade deficit.
    • The disaggregated data shows that core-exports and core imports have continued to contract, and there has been a softening in imports of consumer and investment goods, pointing towards weakening domestic demand.

    What the data shows?

    • Deepening of Contraction: Both exports and imports have seen a deepening of the pace of contraction. Merchandise exports fell by 8.8% in February, while imports declined by 8.2% in the same month. These figures follow a decline of 6.6% and 3.6% in exports and imports respectively in January.
    • Narrowing Trade Deficit: The contraction has led to a further narrowing of the trade deficit to $17.4 billion in February.
    • Impact on Export Destinations: The report by Nomura reveals that the sharpest declines have been observed in India’s exports to the US, China, Japan, and the rest of Asia.
    • Overall Growth: The higher export growth in the first half of the financial year has pushed overall growth for the year so far (April-February) to 7.55%.

    Sectors Affected

    1. Exports side:
    • The disaggregated data reveals that core exports, which exclude exports of oil, gold, and gems and jewellery, have continued to contract.
    • 16 out of the 30 main export segments have fallen in February, including labour-intensive segments such as leather and textiles.
    • Non-oil non-gems and jewellery exports are almost at the same level as last year.
    1. On the imports side:
    • Core imports, which exclude oil, gold, and gems and jewellery, have also continued to contract.
    • The data points towards a softening of imports of consumer and investment goods, indicative of weakening domestic demand.

    Back to basics: Trade Deficit

    • A trade deficit occurs when a country’s imports of goods and services exceed its exports.
    • In other words, it is the amount by which the value of a country’s imports exceeds the value of its exports. It is often seen as an indicator of a country’s economic competitiveness and can have implications for the overall balance of payments and the strength of the domestic currency.

    How Narrowing of trade deficit is beneficial?

    • Narrowing of the trade deficit means that the country is importing fewer goods than it is exporting, which can improve the overall balance of payments and help to strengthen the domestic currency.
    • This can also have positive effects on the economy by reducing the dependence on foreign borrowing and boosting domestic production and employment.

    The outlook for exports remains subdued

    • According to a report by Crisil, India’s merchandise export growth is likely to moderate to 2-4 per cent in the coming fiscal year as two of the country’s biggest destinations for exports the US and EU are expected to slow down sharply.
    • As per the International Monetary Fund’s latest World Economic Outlook, the US economic growth is expected to slow down from 2 per cent in 2022 to 1.4 per cent in 2023, while the Euro region is expected to moderate from 3.5 per cent to 0.7 per cent over the same period.

    Conclusion

    • The trade data indicates a slowdown in the economy. Sluggish exports and tight monetary policy are expected to reduce growth further. This assessment by the World economic outlook implies that exports are unlikely to provide a fillip to growth. The overall economic momentum will be further weighed down as the full impact of the RBI’s tighter monetary policy will be felt across the country.
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  • Growth Prospects: India Better Positioned Than China

    India

    Central Idea

    • The Chinese government’s growth target of 5% for 2023 has disappointed observers, given that it is lower than last year’s target and below the expected GDP growth for India in 2023. This is all the more surprising if one considers that India is benefiting from the positive impact of the country reopening after COVID-19 lockdowns while China should benefit from its reopening only this year.

    Reasons for China’s lower growth target?

    • Risk of undershooting growth target again: The Chinese government does not want to run the risk of undershooting its growth target again, as it happened in 2022.
    • Weak external demand and doubts about private investment: Even if consumption is recovering, external demand remains weak and it is hard to know whether private investment will indeed rise given the doubts about the role of the private sector in the Chinese economy as well as increasingly cautious sentiment being expressed by foreign investors.
    • Real estate sector dragging down growth: The real estate sector is still dragging down growth.

    Sustainable growth

    • The Chinese government recognizes that too high a growth rate is no longer desirable, as it only aggravates financial imbalances.
    • Instead, they are promoting sustainable growth, which involves a structural shift of the Chinese economy and the implementation of tighter regulatory measures to contain financial risks and achieve more social objectives, such as a green economy and food security.

    Job creation and foreign investment

    • China emphasises the importance of job security as an objective of sustainable growth, with a higher target for new jobs set by the Chinese government.
    • China’s recent charm offensive to retain foreign direct investment in China is an important source of job creation, given the country’s concern about the job market, especially young workers.
    • However, investors are looking at new pastures, with India likely to be a major beneficiary. Foreign investors are beginning to contribute more substantially to job creation in India, which could pose challenges for China as it tries to hold on to foreign direct investment within the country.

    Comparison of India and China’s growth prospects

    • The growth prospects of India and China, with a focus on job creation and competition for foreign direct investment.
    • while India and China may not be too different in size and population, growth prospects differ substantially.
    • The Chinese government’s cautious growth targets are consistent with the current challenges facing the Chinese economy, but they face more competition than before, especially from India, which has a larger market size and labor pool.
    • This pattern of India’s resilient growth and China’s cautious growth targets will accelerate in the next few years, especially if the reshuffling of the value chain continues, pushed by geopolitics and high costs in China.

    Conclusion

    • The Chinese economy could be facing structural deceleration while India enjoys the benefits of its demographic dividend. China’s structural deceleration and tighter regulatory measures may also affect its future growth prospects. As a result, India may be better positioned for sustained growth compared to China in the coming years.
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  • What is India-Bangladesh Friendship Pipeline (IBFP)?

    pipeline

    Prime Minister and his Bangladeshi counterpart inaugurated a 131.5-kilometre-long India-Bangladesh Friendship Pipeline (IBFP) from Siliguri in North Bengal to Parbatipur in Banglaesh’s Dinajpur province.

    India-Bangladesh Friendship Pipeline (IBFP)

    • IBFP is a cross-border energy pipeline that connects Siliguri in West Bengal, India to Parbatipur in Dinajpur district of Bangladesh.
    • It has a capacity of transporting 1 Million Metric Ton Per Annum (MMTPA) of High-Speed Diesel (HSD) from India to Bangladesh.
    • The pipeline is aimed at enhancing energy cooperation between India and Bangladesh and strengthening people-to-people linkages between the two countries.
    • The construction of the pipeline was started in September 2018.

    Importance of IBFPL to Bangladesh

    Ans. Looming energy crisis

    • Bangladesh is facing a significant energy crisis that threatens to impede its growth.
    • The country has frequent power cuts, even in the capital, Dhaka, which has had a negative impact on key export industries such as the ready-made garments sector.
    • To address this problem, the Indian government has initiated several projects to help Bangladesh meet its growing energy demands.
    • The IBFPL is one such project that will play a vital role in addressing the country’s energy deficit.
    • The pipeline will transport diesel quickly into Bangladesh, thus ending the country’s reliance on importing petroleum product in oil tankers by road and rail from India.

    Other projects to meet Bangladesh’s energy demands

    • Maitree project: The US $2 billion worth project is being built under a concessional financing scheme offered by India to Bangladesh. The first unit of the Maitree Super Thermal Power Production in Bangladesh’s Khulna province is already supplying 660 MW to the country’s national grid.
    • Power import: Bangladesh is also awaiting power from the Adani Group’s 1600 Megawatt thermal power station at Godda in Jharkhand. Talks are currently underway to import at least 600 MW of power from this plant to meet Bangladesh’s peak summer demand.
    • BIFPCL: The two countries set up the Bangladesh India Friendship Power Company Limited (BIFPCL), a 50:50 joint venture between India’s National Thermal Power Corporation and Bangladesh Power Development Board. Once completed, this will be Bangladesh’s largest power plant.

    Why is India helping Bangladesh?

    Ans. To offset Bangladesh’s dependence on China

    • India’s assistance to Bangladesh in meeting its energy needs is also aimed at offsetting that country’s dependence on China.
    • Chinese investments in Bangladesh’s energy sector stand at US $8.31 billion.
    • Beijing has also offered to help Bangladesh transition to renewable sources.
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  • How India’s Sugar Exports to the world are surging?

    sugar

    Central idea:  India’s success story in sugar exports

    • India’s sugar exports have soared from $810.9 million in 2017-18 to $4.6 billion in 2021-22, and could cross $5.5 billion in the fiscal year ending March 31.
    • The increase is significant in quantity terms too, with India’s shipments increasing from a mere 0.46 lakh tonnes in 2016-17 to 110 lakh tonnes in 2021-22.
    • India has gone from being a marginal player in sugar exports five years ago to No. 2 in the world currently, behind only Brazil.

    Favourite destinations

    • The biggest importers of Indian raw sugar were Indonesia (16.73 lt), Bangladesh (12.10 lt), Saudi Arabia (6.83 lt), Iraq (4.78 lt) and Malaysia (4.15 lt).
    • The country also exported 53.71 lt of white/ refined sugar, the leading destinations for which included Afghanistan (7.54 lt), Somalia (5.17 lt), Djibouti (4.90 lt), Sri Lanka (4.27 lt), China (2.58 lt), and Sudan (1.08 lt).
    • The highest decline in exports has been registered by the European Union (which produces sugar from beet, unlike India and Brazil that only crush cane): from 39.74 lt in 2017-18 to 8.02 lt in 2021-22.

    Which grades of sugar does India export?

    • Raw sugar is what mills produce after the first crystallization of juice obtained from crushing of cane.
    • This sugar is rough and brownish in color, with an ICUMSA value of 600-1,200 or higher.
    • ICUMSA is a measure of the purity of sugar based on color.
    • This raw sugar is processed in refineries for removal of impurities and de-colorization.
    • The end product is refined white cane sugar having a standard ICUMSA value of 45.
    • Till 2017-18, India mainly shipped plantation white sugar with 100-150 ICUMSA value, also known as low-quality whites or LQW in international markets.

    Reasons behind India’s surge in sugar exports

    • Indian raw sugar is free of dextran, unlike Brazilian raws.
    • Indian mills can supply raws with a very high polarization of 98.5-99.5%, which is higher than the polarization of raws from Brazil, Thailand, and Australia.
    • Indian raws today fetch a 4% premium over the global benchmark (New York No. 11 futures contract) price, while LQW sells at a $40/tonne discount to the world price (London No. 5 futures) for 45 ICUMSA whites.
    • Indonesia agreed to tweak its norms in December 2019 to enable imports from India, which further boosted India’s efforts to push exports of raws.

     

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  • Operation Greens Scheme: TOP Farmers Protests And A Way Ahead

    Central Idea

    • The Operation Greens scheme aimed to develop a value chain for reducing extreme price fluctuations in the three basic vegetables (tomatoes, onions, and potatoes), enhance farmers’ realizations, and improve their share of the consumer rupee. However, the scheme has not been successful in achieving its goals, as seen by the recent protests against low prices by onion and potato farmers.

    What is Operation Greens scheme?

    pib] Operation Greens Scheme - Civilsdaily

    • The Operation Greens scheme is a government initiative launched in the 2018-19 Union budget by the present government.
    • It aims to develop a value chain for reducing extreme price fluctuations in the three basic vegetables, including tomatoes, onions, and potatoes (TOP).
    • The scheme was later expanded to 22 perishable crops in the 2021-22 budget.
    • The government hopes that by developing a sustainable value chain for these perishable commodities, farmers will benefit from better price realization, while consumers will have access to quality products at reasonable prices.

    Aim & Objectives:

    • To enhance value realization of TOP farmers; reduction in post-harvest losses; price stabilization for producer and consumers and increase in food processing capacities and value addition.
    • Price stabilisation for producers and consumers by proper production planning in the TOP clusters and introduction of dual-use varieties.
    • Reducing post-harvest losses by creation of farm gate infrastructure, development of suitable agro-logistics, creation of appropriate storage capacity linking consumption centres.
    • Increasing food processing capacities and value addition in the TOP value chain with firm linkages with production clusters.
    • Setting up a market intelligence network to collect and collate real-time data on demand and supply and price of TOP crops.

    Components:

    • Short-term intervention by way of providing transportation and storage subsidy @ 50% and
    • long-term intervention through value addition projects in identified production clusters with Grant-in-aid @ 35% to 70% of the eligible project cost subject to a maximum of Rs. 50 crore per project

    Limited Success of Operation Greens Scheme

    • Retail tomato prices: Tomato prices in wholesale markets have dropped significantly, but retail prices have not reduced much, indicating limited success.
    • Low Onion price: Onion and potato farmers are protesting against low prices, highlighting the scheme’s lack of effectiveness.
    • For instance: There are protests by Maharashtra’s onion growers against low prices, including relay hunger fasts, stoppage of auctions at major mandis, and a 200-km march to Mumbai. Similarly, potato farmers in Uttar Pradesh have demanded that the government procure their tuber at Rs 10 per kg, as against the ruling Rs 6-6.5/kg market price at Agra.

    Reasons behind its limited success

    • Problem Not with Lack of Storage or Processing Capacity: UP alone has an abundance of cold stores with ample capacity to store perishable goods like potatoes. Maharashtra’s growers have built enough kandha chawls to store onions for 4-6 months. Despite the creation of storage capacity, price volatility persists in milk and cane payment arrears to farmers.
    • Price Volatility: The prices of TOP crops have been volatile, which has adversely affected both farmers and consumers. The prices of these commodities tend to fluctuate sharply due to seasonality, weather conditions, and other factors, resulting in uncertainty and instability in the market.
    • Implementation Issues: The scheme’s implementation has been marred by delays, bureaucratic hurdles, and lack of coordination among various stakeholders, which has resulted in low participation and limited success.
    • Lack of Market Linkages: Another reason for limited success is the lack of market linkages between producers and consumers. The farmers are unable to access markets directly, which leads to dependence on intermediaries who manipulate prices, resulting in price volatility.

    Need for Price or Income Assurance for Farmers

    • Investment: Investment in farm-gate, agri-logistics, and storage-cum-processing infrastructure needs to be encouraged.
    • Assurance: Price or income assurance for farmers is necessary, especially for horticulture, dairy, and poultry producers who do not enjoy minimum support price benefits.
    • Diversification: The future for Indian agriculture lies in crop diversification, which will spur greater consumption of foods incorporating proteins (pulses, milk, eggs, and meat) and micro-nutrients (fruits and vegetables), instead of only calories and carbohydrates.
    • Deficiency price payments: The deficiency price payments or per-hectare direct income transfers could be the way forward.

    Conclusion

    • It is evident that the limited success of the Operation Greens scheme underscores the urgent need for a more comprehensive approach to address the challenges faced by TOP farmers. A more holistic approach is required that prioritizes farmer empowerment, investment in infrastructure, and promotion of crop diversification. By adopting such an approach, the government can not only mitigate the impact of price volatility on farmers but also achieve its broader goal of building a sustainable and resilient agricultural sector that benefits both producers and consumers alike.

    Mains Question

    Q. What is Operation Greens scheme? Analyse its limited success in achieving its objectives and Suggest measures to improve the scheme’s effectiveness.

     

  • PM MITRA Scheme: 7 States to get textile parks

    pm mitra

    The Centre has selected seven states in India to set up new textile parks under the PM MITRA (Mega Investment Textiles Parks) Scheme.

    What is PM MITRA Scheme?

    • The scheme was announced in October 2021, and the parks will be established by 2026-27.
    • MITRA aims to enable the textile industry to become globally competitive, attract large investments, and boost employment generation and exports.
    • It will create world-class infrastructure with plug and play facilities to enable create global champions in exports.
    • It will be launched in addition to the Production Linked Incentive Scheme (PLI).
    • It will give our domestic manufacturers a level-playing field in the international textiles market & pave the way for India to become a global champion of textiles exports across all segments”.

    Its implementation

    • An special purpose vehicle (SPV) owned by Centre and State Government will be set up for each park, which will oversee the implementation of the project.
    • The Ministry of Textiles will provide financial support in the form of Development Capital Support up to ₹500 crore per park to the Park SPV.
    • A Competitive Incentive Support (CIS) up to ₹300 crore per park to the units in PM MITRA Park shall also be provided to incentivize speedy implementation.
    • Convergence with other Government of India schemes shall also be facilitated in order to ensure additional incentives to the Master Developer and investor units.

    Envisaged Benefits

    • The parks will boost the textiles sector in line with 5F (Farm to Fibre to Factory to Fashion to Foreign) vision.
    • The Centre envisages an investment of nearly ₹70,000 crore into these parks, with employment generation for about 20 lakh people.
    • The parks will function as centres of opportunity to create an integrated textiles value chain, right from spinning, weaving, processing, dyeing and printing to garment manufacturing, all at a single location.

    Need for such scheme  

    • Textile industry is critical to India’s economy, employing 4.5 crore people and contributing 7% of GDP. Despite its potential, the industry is facing challenges that need to be addressed.
    • The unorganized textile industry in the country increased wastage and logistical costs, impacting the competitiveness of the country’s textile sector.

    Challenges Faced by India’s Textile Industry

    • High input costs due to high taxes and tariffs, inadequate infrastructure, and a lack of skilled labor.
    • Competition from cheaper imports (ex. from Bangladesh) and a growing informal sector.
    • Environmental concerns related to the industry’s high water usage, pollution, and hazardous waste disposal.
    • The pandemic further disrupted supply chains and led to reduced demand.

    Conclusion

    • PM MITRA Parks represent a unique model where the Centre and State Governments will work together to increase investment, promote innovation, create job opportunities and ultimately make India a global hub for textile manufacturing and exports.
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  • National Champions Model for Infrastructure Development: Pros and Cons

    National

    Central Idea

    • Emerging economies struggle to provide functional and efficient infrastructure. Infrastructure has become a national aspiration good, a mechanism for job creation, and a necessity. The two biggest constraints on infrastructure provision are cost and public good component. This national champion’s model aims to incentivize private sector participation in infrastructure investments, but it also has its own set of challenges and limitations.

    Traditional Financing Approaches and their Limitations

    • The traditional approach to financing infrastructure has relied on tax revenues or government borrowing.
    • However, this creates a vicious trap as poorer economies generate less tax revenue, which limits infrastructure investment, leading to a further spinoff that affects the growth of the economy and keeps the country poor.
    • Increasing public borrowing domestically tends to crowd out private investment, exacerbating the problem.

    National

    The Public-Private Partnership Model and its Problems

    • The Indian government tried to incentivize private sector participation in infrastructure investment by introducing the Public-Private-Partnership (PPP) model in the early 2000s.
    • While the PPP model led to the construction of a lot of infrastructure, it ended in an avalanche of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.

    National

    The National Champions Model and its Innovations

    • The present government has modified the PPP approach by assigning the bulk of infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.
    • This is the national champions model where the government picks a few large conglomerates to implement its development priorities.
    • This model incentivizes national champions to build projects by providing subsidies to cover the costs.
    • New aspects of the National Champions Model:
    1. National champions need control over existing projects with strong cash flows to incentivize investment in projects with low returns and negative cash flows.
    2. Public association of champions with the government’s national development policy generates a competitive advantage for the champions in getting domestic and foreign contracts.
    3. Access to some cash-rich projects allows national champions to borrow from external credit markets by using these entities as collateral, which lowers the cost of finance of other.

    Benefits of National Champions Model

    • Economic growth: National champions can contribute to economic growth by generating revenue, creating jobs, and investing in research and development.
    • Strategic importance: The model can help ensure that the country has a strong presence in strategically important industries, such as defense or energy, which can be critical to national security.
    • Export competitiveness: National champions can become leaders in their respective markets and compete effectively in global markets, which can increase exports and improve the country’s trade balance.
    • Innovation: National champions can invest heavily in research and development, leading to technological advancements that can benefit the broader economy.
    • Access to capital: National champions may be able to access capital more easily than smaller companies, allowing them to make larger investments and pursue growth opportunities.

    The Problems with the National Champions Model

    • Too big to fail: Market and regulatory treatment of conglomerates as too big to fail. This means that these companies are so large and important to the economy that their failure could cause widespread harm to the financial system and the economy as a whole. This opens the door to market hysteria, delayed discovery of problems, and spillovers of sectoral problems into systemic shocks. The recent troubles of the Adani companies in India highlight the potential risks associated with this approach.
    • Encouraging market concentration that can be bad for efficiency and productivity: Concentrated markets reduce competition and can lead to higher prices, lower quality, and reduced innovation. When firms have market power, they have less incentive to improve their products or services, reduce costs, or innovate. This can result in lower overall productivity in the economy.
    • The risk of turning the country into an industrial oligarchy: An industrial oligarchy is where a small group of powerful and influential conglomerates control a large portion of the economy. This can have negative consequences for economic growth, social mobility, and political stability. An oligarchy may be resistant to change and less responsive to the needs and aspirations of the broader population.
    • Uneven playing field: The optics of an uneven playing field in terms of market access and selective regulatory forbearance that can become a significant deterrent for foreign investors.

    National

    Conclusion

    • While infrastructure is a necessary condition for growth, it is not a sufficient one. Effective demand is the problem, as seen in the power sector, where the inability of the power distribution companies to recover payments was the issue. India is at an inflection point in its development path, and the national champions model has its pros and cons that needs to be analyzed before its consideration.

    Mains Question

    Q. What is National Champions Model for Infrastructure development in India? Discuss its advantages and disadvantages.

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  • India’s Foreign Trade Policy set to be revised from April 1

     

    trade

    Central idea: The revision of India’s Foreign Trade Policy, which has been unchanged since 2015 and due for three years, may finally be announced by the end of this month.

    What is a Foreign Trade Policy?

    • India’s Foreign Trade Policy (FTP) is a set of guidelines for goods and services imported and exported.
    • These are developed by the Directorate General of Foreign Trade (DGFT), the Ministry of Commerce and Industry’s regulating body for the promotion and facilitation of exports and imports.
    • FTPs are enforceable under the Foreign Trade Development and Regulation Act 1992.

    What is India’s Foreign Trade Policy?

    • In line with the ‘Make in India,’ ‘Digital India,’ ‘Skill India,’ ‘Startup India,’ and ‘Ease of Doing Business initiatives, the Foreign Trade Policy (2015-20) was launched on April 1, 2015.
    • It provides a framework for increasing exports of goods and services, creating jobs, and increasing value addition in the country.
    • The FTP statement outlines the market and product strategy as well as the steps needed to promote trade, expand infrastructure, and improve the entire trade ecosystem.
    • It aims to help India respond to external problems while staying on top of fast-changing international trading infrastructure and to make trade a major contributor to the country’s economic growth and development.

    Issues with FTP (2015-2020)

    • Acting on Washington’s protest, a WTO dispute settlement panel ruled in 2019 that India’s export subsidy measures are in violation of WTO norms and must be repealed.
    • Tax incentives under the popular Merchandise Exports from India Scheme (MEIS) (now renamed as RODTEP Scheme)and Service Exports from India Scheme (SEIS) programmes were among them.
    • The panel found that because India’s per capita gross national product exceeds $1,000 per year, it may no longer grant subsidies based on export performance.

    Why such a delay in Foreign Trade Policy?

    • Geopolitical uncertainty: The geo-political situation is not suitable for long-term foreign trade policy, said Union Commerce Minister.
    • Global recession: Currently, fears of a recession in major economies like the US and Europe have escalated a panic among investors.
    • Decline in USD inflows: Foreign investors have begun to pull back their money from equities.
    • Rupee depreciation: The US Dollar is at a 22-year high, while the Rupee hit a new all-time low of $81.6.
    • Huge trade deficit: The trade deficit widened by more than 2-folds to $125.22 billion (April – August 2022) compared to $53.78 billion in the same period last year.
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  • NSO’s New Data: India’s GDP Growth

    GDP

    Central Idea

    • The National Statistical Office (NSO) has released a new set of data on India’s annual and quarterly national income, providing a final assessment of the COVID-19 pandemic’s impact on the country’s GDP growth. The latest numbers and sector-wise performance, highlighting areas of growth and contraction.

    Recovery since pre-COVID year

    • Advance estimates: NSO’s second advance estimate (SAE) shows a contraction of (-) 5.7% in 2020-21, lower than its first advance estimate (FAE) at (-) 7.7%.
    • Benefited sectors: Manufacturing, construction, and financial sectors benefited the most in the revised estimate.
    • GDP growth: Real GDP in the COVID-19 year amounted to ₹136.9 lakh crore, higher than the earlier assessment of ₹134.4 lakh crore. GDP grew by 9.1% in 2021-22 and 7% in 2022-23.
    • Negative growth in 2020: The compound annual average growth rate between 2019-20 and 2022-23 was 3.2%. Comparison with other countries, including China, Bangladesh, and Vietnam, shows India’s negative growth rate in 2020.

    Back to basics: Advanced estimates

    • Advance estimates refer to the preliminary projections made by the government regarding the likely economic growth, inflation, or other macroeconomic indicators of a country for a given period. These estimates are usually released a few months before the actual data for the period becomes available.
    • Advance estimates are based on various economic indicators such as industrial production, agricultural output, exports, and consumption expenditure, among others. These indicators are used to extrapolate the economic activity for the full period, based on which the government makes its initial projections.

    GDP

    Sector-wise Performance

    • Overall GVA in 2022-23 is higher by 11.3% compared to 2019-20.
    • Mining and quarrying sector still shows a contraction at (-) 0.3%.
    • Trade, hotels, transport, etc., show weak growth of 4.3%.
    • Construction sector shows higher-than-average growth at 18.6%.
    • Manufacturing sector also shows robust growth at 14.8%.
    • Financial, real estate, etc., grew at 14.3%.
    • Agriculture sector grew at 12%.
    • Government final consumption expenditure (GFCE) grew at 7.4%.
    • Gross fixed capital formation and private final consumption expenditure (PFCE) increased by 17.7% and 13.1%, respectively.

    Investment and Capacity Utilization

    • Gross fixed capital formation to GDP ratio in nominal terms increased to 29.2% in 2022-23 from 28.6% in 2019-20.
    • Real investment rates increased to 34% in 2022-23 from 31.8% in 2019-20.
    • Estimated incremental capital output ratio (ICOR) decreased to 4.9 in 2022-23 from 8.5 in 2019-20.
    • Capacity utilization ratio in the manufacturing sector was only 70.3% in 2019-20, but it increased to 73.5% in the first half of 2022-23.
    • Subdued growth implies lower capacity utilization and higher ICOR.

    Quarterly Growth and Projections

    • Q3 2022-23 saw a decline in real GDP growth to 4.4% from 6.3% in Q2 and 13.2% in Q1.
    • Growth rate in Q3 and expected growth rate in Q4 are quite low.
    • High frequency indicators point towards improved economic activity.
    • PMI manufacturing in January and February 2023 remained above its long-term average.
    • PMI services increased to a near 12-year

    GDP

    Conclusion

    • the NSO’s latest data on India’s GDP growth provides a final assessment of the COVID-19 pandemic’s impact on the country’s economy. The NSO’s data shows that India’s economy is recovering, albeit at a slower pace, from the COVID-19 pandemic.
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