Economy: encouragement interspersed with circumspection

Economy: encouragement interspersed with circumspection

The prevailing economic and financial discourse across the country has an overriding characteristic: indication of measured optimism embowered with caution. Within the country, incremental economic reforms, paving the path for structural changes for relative ease of economic activities, debates for a hasty lowering the country’s nominal interest or repo rate by the RBI, deliberations on GST and demonetisation have been seminal events.

Internationally, the election of president-elect Donald Trump in America, its potentially negative economic impact on IT and outsourcing sectors, crude oil prices, West Asia refugee crisis, ordeals within the European Union, Chinese economic dynamics and the possibility of quantitative tightening by the American Federal Reserve have been acutely discerned to appraise the present situation and prospective direction of the global economy and its attendant affects on the Indian economy.

The extent of aggregate demand (AD) – displaying the relationship between the total quantity of goods and services sought in an economy and the general price level, at a given level of money supply, government spending and taxation rates substantially determines economic attributes along with aggregate supply (AS). The AS – entailing the total quantity of goods and services supplied in an economy relative to the price level or inflation rate, alongside the attendant consideration of the factor of time - and the equilibrium position from the confluence of AD, AS, with the attendant factor of the Balance of Payments (BoP) position, as is said, helps determine the attributes.

How might net AD and AS influence the economic situation and the financial records of India? It could be stated that the scope for a relatively higher equilibrium level, reflecting increased net economic output than before and a reasonably acceptable general price level, might be attained if the appropriate policies and decisions are fully made and implemented. Undesirable loose ends need to be administered the necessary correctives.

Sectors demanding particular attention in the coming months are consumer durab­les, defence infrastructure, banking, renewable energy, among others. To an extent, the prelude to this perspective is laced with encouragement: the core infrastructure sectors of the country comprising of coal, crude oil, natural gas, refinery products, steel, cement, fertilisers and power, have, collectively, registered an uptick in the growth rate to 6.6% at the end of the preceded calendar year, relative to 0.6% of November, 2015.

It is an expansion by 4.9% compared to 2.5% growth from the financial year 2015-16. If the momentum could be maintained, with necessary acclimatisation, the future economic narrative could throw up more opportunities for optimism than otherwise.

Aggregate demand, to put it otherwise, is substantially determined by the country’s general price level. The current AD situation in the country reflects a sober mood, inclined to inch towards the positive. That demand is palpable and is bespoken by the successful government disinvestments through the sale of its stakes in sundry Central Public Sector Enterprises (CPSE).

The government has earned about Rs 21,432 crore through selling its shares in CPSEs, thereby fulfilling about 60% of the aimed target of the national budget regarding public sector disinvestments. In some cases, the government has reduced its shares to below 50%, consequently handing over management to the new owners. At the prevailing price level of 4.9%, the volume of AD is encouraging. It shows that there is investor demand to purchase the concerned sold shares. It indicates that notwithstanding harbingers of certain sluggish tendencies in the economy, other aspects are strong enough to contribute to the increase in AD.

The RBI has asked the country’s various banks to increase the circulation of new currency notes in their rural branches with the aim to further unshackle the flow of money to the country’s vast rural economic sector. It has insisted respective banks to segregate about 40% of the currency stocks for the rural branches to significantly ease the availability of liquid cash.

It is a notable step to ensure that the concerned businesses and traders there have ample financial resources in their hands to give appropriate effect to their respective demand thereby continuing and contributing a good measure of dynamism in the economy; that would contribute positively to the level of AD.

With positive stirrings and scope for demand, the country’s aggregate supply is bound to respond appropriately. For ease and better comprehension, the net supply situation follows a long run as well as a short run position. The long run supply curve is determined by the quantity of capital, labour, technology and natural resources. It ultimately attains a stable level in output, despite varying prices.

Supply levels

In the short-run, net aggregate supply increases with higher prices, till it is compatible with net demand. Short-run supply levels could be different from the long run level, as increased or decreased supplies take time to adjust to the equilibrium levels inherent for the long-run trend.

This is due to market imperfections whereby producers or suppliers take some time to decipher the breach in differences between inputs and output prices and later adjust their output extent accordingly. Ultimately, it blends with the long-run trends whose positions could itself vary with the altering economic situations.

It is inevitable that with the demand in certain sectors signalling enhancement, supply levels would respond likewise. Additionally, the GST Council is being asked by the Commerce Ministry to keep exporters of the plantation, leather and cement out of its framework and impose lower taxes on them as an incentive to boost output and increase employment generation. If so, then the Indian exporters of these sectors could receive a necessary stimulus to increase their production, and better compete in the global market for their products. Supply levels would also get a relatively healthy fillip.

When the necessity to square it off with additional investments arises, the RBI, at an opportune time, could engineer a monetary expansion by lowering the repo rate. Niti Aayog Vice Chairman Arvind Panagariya, has opined that he looks forward to the impending fiscal quarters of the new financial year with optimism. With ongoing Gross Domestic Product clocking at 7.3%, it bespeaks of hope laced with admonition.

(The writer is an analyst on international finance)