No doubt there was a round of meetings with states which demanded substantial relief assistance while they were asked to act against hoarders, strengthen food distribution to the rural poor and launch relief programmes. There are varying estimates of crop damage. Apparently, Government would want to wait till the end of September to get a clearer picture of the output loss and price trends before it comes up, if at all, with a strategy to cushion the impact of drought while combating inflation is left, for the greater part, to the monetary authority (RBI).

The Reserve Bank of India's annual report (2008-09) issued on August 27 projects a sombre outlook for the economy with a deficient monsoon adversely affecting agricultural output and putting pressure on food prices as well as increasing the demand for more subsidies and relief measures. Fiscal pressures could increase if drought-related policy responses involve further expansion in government expenditure and additional costs in import of essential commodities. Given high food prices already prevailing, RBI says, the supply side of food management would assume “critical significance” for Government.

While adhering to its earlier targets of GDP growth and inflation in the current year at 6 per cent and 5 per cent respectively, the report does not see any early return to high growth trajectory as the sharp decline in external demand remains a “major drag” on recovery for all economies. Growth impulses have to depend even more on domestic demand than in the past and public expenditure has to take the lead in boosting aggregate demand (as reflected in the stimulus packages) in the face of deceleration in private consumption and investment demand. But, it points out, a revival in private consumption demand is essential to stimulate investment demand and that would also facilitate fiscal consolidation in the coming years.

RBI, which effectively intervened last year to bring down double-digit inflation and later provide massive amounts of liquidity to boost productive sectors to sustain growth, is now in a dilemma in dealing with what it calls an “unpleasant combination of subdued growth with emerging risk of high inflation”. Withdrawal of monetary accommodation, it points out, entails the risk of weakening recovery impulses but sustaining the accommodative stance and the associated protracted phase of high money growth would only increase inflation in future. Secondly, Government's huge borrowing programme and high fiscal deficits further complicate the challenges for monetary policy by accentuating inflation expectations.

One area where there will be less concern for growth and stability is the external sector. With both exports and imports on downtrend, imports faster, the current account deficit would be lower, certainly in the current year, Global commodity price increases, especially oil, may put some pressure on trade and current deficits. Capital outflows experienced in 2008-09 seem to have halted and inflows in the first quarter (April-June) were of the order of 15 billion dollars, mainly foreign investment, direct and portfolio flows.

International forecasts about world output and trade trends are not encouraging and there are uncertainties about the duration of the recession and strength of expected recovery next year for the developed economies as a whole. Major exporting nations, among developed and developing like China, have been badly hit and, though not highly export-dependent, India has suffered significant trade contraction for ten months already. The WTO and IMF estimated volume growth decline at 9 to 11 per cent this year and mild recovery in trade flows in 2010.

It is against this grim scenario that the Foreign Trade Policy for the next five years, 2009-14, has been framed, less ambitious in setting goals and more realistic in terms of reversing the decline and sustaining export growth. Commerce Minister Anand Sharma said India had to take cognisance of declining demand in the developed world and some countries have resorted to protectionist measures posing barriers to foreign trade aggravating the problem.

Also, the modest objectives in the new policy must be seen in the context of the emerging scenario which envisages a rebalancing of growth among trading nations, the deficit and surplus countries, which would help to resolve global imbalances. India is not in this category but still it would have to find new markets.

The Policy expects India would have an export turnover of 200 billion dollars in 2010-11 while in the current year, the expectation is India would manage to maintain the export level of 168 billion dollars recorded in 2008/09. For the subsequent three years, Mr. Sharma has set a 25 per cent growth target so as to double the total of exports by 2014. As a share in world exports, India, after many years, managed to reach 1.45 per cent in 2008 (WTO) (as against 8.9 per cent of China). Mr. Sharma assumes India would double its current share of world merchandise trade by 2020.

To get round the problem of lack of demand from developed markets of USA and Europe, which traditionally accounted for 40-50 per cent of India's exports, the Policy calls for diversification of export destinations. Incentives are provided for exporters to tap emerging markets in Africa, Latin America, Oceania and Central Asian countries. Fiscal incentives, procedural improvements, full refund of indirect taxes and lowering of transaction costs for exporters all form part of the Policy which has been welcomed by trade and industry though the apparel exporters felt it did not provide the expected boost needed even to retain the current share in clothing exports.

Mr. Anand Sharma expects that the free trade agreements he had recently signed with Korea and ASEAN would provide enhanced market access to several items of Indian exports. While exports do create job opportunities, the claim that 14 million jobs were directly or indirectly created by the relatively robust export growth of the last five years needs scrutiny, though Mr. Sharma said the figure was suggested in “studies”. (IPA Service)