Mixed signals

Till there is more coherent policy-making,data will flash red and green at the same time.

Till there is more coherent policy-making,data will flash red and green at the same time.

Given the remarkably better current account deficit CAD 5.2 billion in Q2FY14 versus 21.8 bn in Q1FY14 and 18 bn,32.9 bn and 21 bn in the preceding three quarters it is not surprising the finance minister cited this as yet another sign that the economy was turning around. With the CAD for the first half of the year at 27 bn versus 38 bn in the same period of FY13,the full years CAD is now on track to be around 50 bn,or 2.7 per cent of the GDP,a remarkable compression compared to last years 4.8 per cent. The US taper,likely around March or April next year,will once again result in FII money moving out. But,apart from the much lower CAD,the 34 bn the RBI managed to get in so adroitly through its swap window keeping oil company demand out of the forex market,and then reintroducing it,was another smart move will ensure India is much better prepared this time.

Though it is true the 16.6 bn reduction in the CAD this quarter largely comprised a sharp 12.7 bn compression in gold imports,there is a slight improvement in non-oil non-gold imports. These are up from 66 bn in Q1FY14 to 69.8 bn in Q2FY14,suggesting a slight pick up in domestic demand,a point reflected in the GDP data as well. The latest Purchasing Managers Index PMI data for November reinforces this. For the first time after three straight months of contraction,the PMI was at 51.3 a number above 50 indicates an expansion. Analysis of sub-indices of the PMI suggests that,since prices of inputs are falling faster than the prices of finished products,margins of manufacturing firms are likely to look better in the months ahead.

Yet,look at other data,on project starts or on sales of commercial vehicles CVs CV sales contracted 16 per cent in April to October over the same period last year or even credit growth,and it suggests an economy not yet bottomed out. There is an explanation for the apparent contradiction. Since the economic pulse is weak,big-ticket spending on new projects is certain to be weak. That is not going to pick up till,arguably,there is clarity on the next government,its stability and economic policies. India Inc,similarly,needs to clean up its balance sheets before meaningful investments can take place. Even the CAD that looks under control right now remains structurally flawed,with high imports of coal and scrap iron and low exports of steel certain to rise once the GDP starts rising. This cannot be fixed till mining bans are lifted or,for instance,the coal sector is opened up. In other words,a low-level equilibrium is where were at.