6th April

Look inward for growth

The article talks about looking inward for enabling growth in these recessionary times. By inward, it means tapping the rural market which has seen faster growth then their urban counterparts.

While Hero Honda saw a sales jump of 10.3% in March 2009 and 11% for the entire fiscal 2008-09 when the industry growth was 1.9%, Maruti showed 15% rise in sales in March. The common thread between the two was their strong rural market. While rural sales accounted for 8.5% of sales in 2008-09 as against 3.5% in 2007-08 for Maruti, for Hero Honda, its strong distribution network in rural market has accounted for huge sales. HUL also has more then 50% of its sales coming from rural market. While rural market has been growing on account of four straight good monsoons as well as various government incentives like subsidies, income transfer through NREGS and farm loan waiver, there is a huge demand in the rural sector for goods and services. However government’s present fiscal position doesn’t allow it to continue the benefits in the future and monsoon can fail anytime. Thus there is a need to de-risk and strengthen the rural market. Increasing farm sector productivity and services sector that currently accounts for 28% of rural GDP and growing at more then 30%, is necessary. With 30% of farm households having access to formal banking, there is a huge potential of financial services which is currently available through money lenders. 

There is also potential in healthcare, education, broadband and several other services that can help in achieving the 8% growth mark. 

Sharpest decline in Trade

The article talks about the sharp declining trade in rupee terms that is a serious cause of concern and demands sooner government intervention. However, the good news is that non-oil imports have continued to rise which suggests increase in economic activity.

In dollar term terms the exports shrank by 21.7% in Feb 2009 and the imports by 23.3%. But in rupee terms, the decline was 3% after the increase of 4.3% in January and 22% in December. This shows erasing of gains by the rupee depreciation of almost 25% in the intervening period. This also means the exporters would now need more government help on account of declining exports. Imports, as well, fell by 4.9% after growth of 1.4% in January. However, excluding oil imports, the growth is 10% Y-o-Y which is contrary to the conventional wisdom which says that imports shrink when the currency depreciates. This shows that economic activity hasn’t weakened that much. Non-oil imports include capital goods, intermediate goods, gold and unpolished gemstones etc. While decline in commodities prices provide good help, the huge relief came from 48% decline in oil bills compared to a year ago. This has helped to narrow the trade deficit by 27% compared to February 2008 which stands today at $4.9 billion. It would help in balance of payments as well.

However, the real threat to the domestic economy comes from the declining demand.