Trade deficit has ballooned to a three-year high. Prices of vegetables and fuel have firmed up leading to a mark-up in wholesale level inflation that has reached a six-month high of 3.59 per cent. Inflation in food articles has more than doubled to 4.30 per cent in October. In case of onions, inflation has skyrocketed to over 127 per cent, while price rise in fuel and power segment has reached 10.5 per cent. Fuel inflation has remained high over the past three months as petrol and diesel prices continued to rule high, tracking global crude prices.
Retail inflation for October rose to a seven-month high at 3.58 per cent. Industrial production for September has expanded by a mere 3.58 per cent on poor showing by the manufacturing sector coupled with a decline in consumer durables output. However what has taken the cake is the rising trade deficit that has reached a three-year high. Exports have contracted. As per official figures, exports declined by 1.12 per cent to $23 billion in October, clawing back from a six-month high growth in September. Shipments of textiles, pharmaceuticals, leather, and gems and jewellery have come down by courtesy of sluggish production. Imports have gone up by 7.6 per cent to $37.11 billion in October from $34.5 billion in the year ago period. Trade deficit has widened to $14 billion in October as against $11.13 billion in October last year.
Tempered industrial activities and subdued consumption are upshots of uncertainties triggered by demonetisation and implementation of the Goods and Services Tax (GST). Nearly all macroeconomic indicators are in the negative territory. Traders and small businessmen are yet to fully grasp the import of GST as ambiguities remain in the indirect tax system. Decisions taken by the GST Council are not implemented forthwith, compounding day-to-day problems. The recent scaling back of GST load from 28 to 18 per cent on 178 items of common use is not adequate to endear the new tax regime to people. A major hurdle in getting the GST accepted is the lack of awareness among the public. The confusion has helped traders and small-time businessmen fool unsuspecting people. The government has decided to set up GST appellate authority in every state, but it is yet to become a reality.
The setback in exports could be due to a squeeze on working capital for exporters. The note recall in November last year had impacted labour-intensive industries such as gems and jewellery, readymade garments, carpet, handicrafts, man-made yarn/made-ups and leather items. Not long after demonetisation, workers from industrial towns having export-centric industries such as Surat, Ahmedabad, Vadodara, Kanpur, Chennai and Thane were thrown jobless and they headed back home. The withdrawal of valid tenders at one fell swoop put paid to commercial activities and had a negative impact on consumption patterns. Industrial production stuttered. All this combined to affect exports. Even as the global market is in the middle of an upturn, there is no reason why exports will take a beating unless it is for internal factors. Exporters, particularly medium and small ones, faced liquidity crunch to pay GST for four months in a row without getting any refund. Hopefully, the latest changes in the tax regime would bring in clarity that would help exporters.
The government must take immediate measures to check a further slide in exports; otherwise the situation could be worse for the current month. A prolonged spell of negative trade balance will negatively work on other macro parametres such as current account deficit and fiscal deficits. Implementation of decisions taken by the GST Council must be quick and comprehensive. The global economy, especially the US and west European countries is in the middle of a recovery. We must seize this opportunity and increase exports to these countries. Opportunities in ASEAN countries must be explored to increase exports. But to take advantage of this, the government must do well to plug the pitfalls in the GST rules, especially the new accounting procedure.