IMF chief Christine Lagarde recently irked the consultancy firms worldwide as she suggested that the low-income and emerging-market economies should desist from hiring global consultancy firms to build their strategic plans. She recommended the adoption of seven development goals set by the UN, instead.
“I see many, many low-income countries and emerging-market economies spend millions of dollars commissioning consultants to build their strategy plan. I would recommend some saving be made by taking the 17 principles, the actionable items, and start with that. From there, the consultants can actually do their job of putting it into reality. But don’t reinvent it — it’s right there. So much is wasted. That’s part of the inefficient spending that can actually be saved,” the former French government minister commented at the World Economic Forum (WEF) in Davos, Switzerland, generally putting the consultancy fraternity at unease.
Can economically struggling nations save big time by cutting their use of global consultancy firms? Team Intueri tries to find an answer.
Management Consulting Industry and Technology Disruption
From its inception years, management consultants as professionals have sought to differentiate themselves by transcending their assigned scope and embedding themselves deep into their clients’ operations. The usual “Where to play? How to win? What to do next?” pitch, coupled with an ability to think in a structured manner, did succeed in yielding the movers and shakers of consulting sustained profits for more than a century.
It would be prudent to note that most corporate strategy arms extensively poach consultants from the major consulting firms. Further, the concentration of business-oriented MBA hires has impaired their ability to keep up with the curve of the rapidly changing business environment. Thus, these same companies are facing the risk of disruption owing to Big Data becoming an omnipresent reality.
Building a Strategy Consulting Model Tuned to the Emerging Economies
What should our next bet be, and how should we scale up our operations? How can we reskill our employees to keep abreast with the changing realities? What can be the next breakthrough product that we ought to focus our attention upon?
These are some of the pressing, complex questions that keep today’s CEOs awake at night. These warrant the adoption of rich data as equally (if not more) important business insight as raw intuition and/or allied experience. In this regard, it is imperative that consultants re-think their value propositions and tune themselves to undertaking data-driven decisions. Further, the limited success met by major developing economies in effecting serious reforms and/or structural adjustments does indicate that consultants need to re-evaluate the very precepts of globalization which underpin their very existence. More specifically, today’s global milieu represents an inflexion point wherein advisors can succeed only if they change their modus operandi from trying to force-fit the best operating practices of benchmark institutions to a “glocalized” model, rooted in operating-level realities.
While it is true that global consultancy firms are expensive; it is also true that in many ways, they can make it easy for poorer nations to find a route to prosperity. Above all, to be effective, strategies should be followed by a flawless execution plan. Therefore, eliminating the multinational consultancy firms entirely from the equation will never be a sensible option for struggling economies. Instead, they should focus on the apposite, bias-free execution of the blueprint laid out by these esteemed consultancies.
The annual World Economic Forum (WEF) concluded this past Friday in Davos. From discussing the ways to deal with climate changes to pondering over the future of Venezuela, the world’s High and Mighty have made headlines with their rhetoric amid an atmosphere of unprecedented uncertainty, fragility and controversy. The Team Intueri loved to keep sharing updates on everything that were going on over the past few days at the picturesque ski resort of Davos. As the mega event draws to a close, we make a summary of key themes that we think, would play a role in shaping the global, regional and industry agendas in the coming months.
Structural issues like U.S.-China trade tensions and climate change could trigger a catastrophe which could, in turn, affect the growth of emerging countries like India and China. There is a reason for profound pessimism which we have to adjust to a distinct possibility of a catastrophic outcome due to these structural issues. India is a “bright spot” despite challenges to growth in the U.S. and Europe. India continues to have a growth in excess of 7 percent. She seems to remain immune from this (pressure) and benefited from the low oil prices.
1. A Weakening World Economy
Global economic weakness remains a concern although the offing of recession is not much in the radar. Growth looks better than in the previous years. Advanced economies are doing better than anticipated especially Euro Area and Japan. The UK has ended 2016 as the fastest growing of the developed economies but the forecast for 2017 will be lower. International Monetary Fund’s, which expect global economic growth to decelerate to 3.5 percent this year.
2. Brexit Bedlam
Concerns over Brexit are growing, the key challenge remaining the time frame. After Theresa May stated that Brexit would mean the the exit from a single market, the agreement between UK and EU in a mutually beneficial manner to remove uncertainty which may hurt business and economy on both sides. A 2-year time frame looks hard to complete the Brexit process. ‘As to whether Brexit can happen within two years, Hammond is cautiously optimistic’.
3. Crying over Climate Change
The World Economic Forum’s Global Risk Report 2019 shows only too clearly, environmental crises – notably a failure to tackle climate change – are among the likeliest and highest-impact risks that the world faces over the next decade. Indeed, 2018 saw record levels of costs due to extreme weather events. Warnings of a climate change catastrophe have been put forward by scientists unless urgent action is taken to “bend the curve” on rising greenhouse gas emissions.
4. The Geopolitical Recession and a New Global Order
Geopolitical Recession poses a bigger risk than the slowdown in the U.S and China. The playout of domestic factors of any country in terms of growth, jobs and prosperity are of higher concern amidst the geopolitical characteristics of the world is important to note.
5. Getting Into the Era of Globalization 4.0
It is the onset of globalization 4.0, however, the world is vastly unprepared for it. Clinging to an outdated mindset and tinkering with the existing processes and institutions will not do. Rather, redesigning them from the ground up is the need, so that we can capitalize on the new opportunities avoiding the kind of disruptions that are witnessing today. The challenges associated with the Fourth Industrial Revolution (4IR) are coinciding with the rapid emergence of ecological constraints, the advent of an increasingly multipolar international order, and rising inequality. These integrated developments are ushering in a new era of globalization.
6. Two Schools of Thoughts Taking the Center Stage
The WEF theme ‘shaping a global architecture in the age of the fourth industrial revolution enabled many loosely related strands of discussion, to come to one location. Two schools of thought were displayed this year. The ‘incrementalists’ pointed to the fact that AI is not a new phenomenon and has, in fact, been around since the 1950s. This technology is increasingly advanced, but it is useful to think of current breakthroughs, in areas such as deep learning. Then there were the ‘radicals’, who told the gathered crowd that the world is experiencing the fastest adoption of new technology ever – with exciting and scary consequences just around the corner. The radicals also highlighted the fact that a small group of mostly American and Chinese companies completely dominate the field of AI research.
We noted these as the main key areas of discussion in the WEF 2019. Global leaders have been deliberating these issues taking cues from developments in the global economy. India has been a focus, drawing much attention from the trade tensions occurring in the West. Alongside, The WEF also brought leaders together to discuss “key global faultlines” including the western Balkans and Syria. Summing up, the WEF lacked buzz without Donald Trump as unease over Brexit and global recession dominated the summit.
It’s always good to take time to reflect on the past year before you look ahead to set your goals for the new one. Intueri looks back at the year that was and shares its analysis of the key events of 2018 that may have an enduring impact upon global value chains and shape the way forward in 2019. Look ahead by looking back.
The US and China Story: Global Giants at Odds
In retrospect, 2018 did appear to finally put paid to any lingering macroeconomic fragility ushered in by the Lehman Crisis, with the IMF setting its global economic growth forecast at approximately 3.7% for both 2018 & 2019 (in line with the 50-year average). This feeling seemed especially pronounced in the early stages with the then newly-instated Fed chief, Jerome Powell, expressing an unambiguous commitment to a bullish Fed rate hike cycle in synchrony with strong US earnings growth and historically low unemployment rates.
Closer home, the Monetary Policy Committee (under the aegis of the RBI) displayed an enduring commitment towards its inflation targeting framework by hiking India’s key policy rate twice in successive bi-monthly policy deliberations. However, tell-tales signs indicative of fault-lines in the global financial armory had become quite evident by the time the latter of these policy meets was held. For starters, trade tensions as a theme perpetuated throughout the year and climaxed with the US-China trade war reaching a melting point in the second half of 2018. The contingent impact on the global markets was especially heightened as this diplomatic “Armageddon” per se emerged close on the heels of Kim Jong-Un’s successive parleys with Donald Trump and Xi Jin-Ping. Back then, the apparent bonhomie shared by the leaders seemed to convey more sanguine prospects for a truce, thereby affecting a sharp reduction in macroeconomic volatility. The elaborating effects of the US-China trade war continue to loom on the global economy as negotiations are due to continue till the March 2 deadline.
Thus far, both the sides have lost billions of dollars in revenue, hitting sectors such as autos, technology, and agriculture, and crippling the global innovation ecosystem, in general.
The inversion of the US bond yield curve serves as the harbinger of a possible slow-down (if not a drastic recession) in the US economy.
Populism Fuelled Uncertainty in Europe, Latin America, and the Middle East
Additionally, eco-political headwinds continued to bear their ugly head throughout the world. Brexit talks have been stalled time and again in the UK Parliament and several experts now even put the chances of Brexit happening at 50%. This has created several uncertainties about the UK’s precise socio-political standing in the global milieu with a strong shadow of ambiguity lurking over the repatriation of several jobs and global trade linkages.
At the moment, Argentina must bear with the triple whammy of a $ 50 billion IMF credit line, record high interest rates (60%), and a plunging currency. Propped by a US-initiated doubling of metal tariffs, the Turkish lira crisis, wherein the currency plunged 28% versus USD, set the country’s inflation rate soaring to a 15-year high of 25%. Popular journalist and raconteur, Jamal Khashoggi’s death does indicate that a politically-motivated stand-off between the US and Saudi Arabia seems to be in the offing as we head into 2019 with the US-led Iran sanctions serving as a ripe precursor.
Oil Is Still Flowing
As an aftermath, having roiled the financial markets in general, the contingent impact of these events on the commodity markets seems especially pronounced. Globally, oil prices peaked in mid-August with WTI crude oil spots flirting with the mid-70s per barrel. Oil prices have reverted ever since and have closed their divergence with other key macroeconomic indicators, following months of Trump-fuelled pressure to keep oil prices low. However, this relief seems to be short-lived and one can expect oil prices to skirt high levels yet again in mid-2019 with the Russia-OPEC cartel agreeing to cut production in a coordinated effort.
Meanwhile, in India
On the face of it, one might consider that these aforesaid macroeconomic headwinds (especially US-China trade dissonance) would augur well for India’s prospects as it could benefit from import substitution, in the short-run, and could emerge as the go-to manufacturing hub for big-ticket players by virtue of its skilled workforce and political neutrality, in the long-run. However, India has had more than its plate full in terms of the idiosyncratic uncertainties it had to deal with in the past year. The first half of the year witnessed the bad-debt crisis balloon to gigantic proportions with the Nirav Modi / Mehul Choksi drama engulfing the attention of not only India’s financial honchos but also its hoi polloi. This was followed by the IL&FS fiasco which laid bare several scathing deficiencies in the extant institutional risk management practices. While there were several major landmarks in India’s social fabric, headlined by the emergence of the #MeToo movement and the abolition of Section 377 of the Indian Constitution, the same can’t be said as far as its political stability goes. In May, the Karnataka assembly elections proved to be an inflexsion point for India’s political landscape with the post-poll Congress – JDS alliance overcoming anti-incumbency and the Modi wave to retain power in Karnataka. Thereafter, Congress’s recent electoral victories in Chhattisgarh, Madhya Pradesh & Rajasthan prove than the 2019 General Elections are far from a foregone conclusion. Given its prime position among emerging markets, India did exhibit more resilience initially to global risk-off scenarios and the Fed’s tightening cycle. Alas, it had to cave in eventually, due to the unforeseen volatility in crude oil prices, marked by unprecedented FII outflows from Indian equities and the USDINR depreciating to 74.71 in October. Amidst spiking inflation owing to higher oil prices, the credibility of India’s central bank (RBI) was called into question by several market pundits when it was indirectly forced to adhere to several of the ruling dispensations demands (inter alia a higher dividend and cheaper borrowing rates). The then governor, Urjit Patel’s shock exit right after has only aggravated the situation and has proved to be a major jolt to India’s domestic fundamentals.
Opportunity in Pursuit of Certainty
It would be prudent to note at this juncture that the picture isn’t as gloomy as it seems to be. India has for the first time been entrusted with taking the lead in hosting the 13th G-20 summit in 2022, thereby signalling India’s intend to enable its corporate houses to ink several bilateral/multi-lateral trade ties in the near future. Further, the European Union has formally espoused India’s participation in starting joint connectivity projects, under its proposed 60 billion Euro plan that aims to provide options beyond China’s Belt and Road Initiative. The appointments of Shaktikanta Das and Krishnamurthy Subramanian, as the RBI Governor and the Chief Economic Advisor respectively, have managed to assuage the financial markets to a great extent and portfolio managers shall keep a close watch on RBI’s future policy on growth and economic stability. Abetted by the Fed Chair’s over-effusive forward guidance on the rate trajectory (implicitly signalling a cessation of the rate hike cycle), the USDINR has stabilized ever since and the pair has reached sub-70 levels after quite a while. The projected slowdown in the US economy as indicated by the inverting bond-yield curve also could be an opportunity in disguise for emerging markets and India in particular.
Given these precepts, 2019 shall prove to be an interesting time for Indian corporate where they can hope to gain windfall business prospects by virtue of strategic positioning and agile execution.
Last month, the Central Statistical Office (CSO) of India came up with a new set of gross domestic product (GDP) data using the 2011-12 base year. Dubbed by some quarters as a ploy against the previous government just ahead of the next general election, the CSO release triggered controversy and upheaval all over the country. Is it really a ploy of the current government to downgrade the GDP growth figures for the 2006-2012 era? Before you reach a conclusion, we recommend you to delve into the nuances of India’s GDP evaluation methodologies.
GDP Base Year Revision Effects
The GDP back series of 2004-05 with 2011-12 base year was released recently. This year it is largely similar directionally but the new base year figures are higher compared to the old one.
Gross Domestic Product or GDP that measures a nation’s overall economic activity has been a much-debated topic for India. India’s GDP is currently measured on 2011-12 base year for the past 3 years. The revision of base year from 2003-04 to 2011-12 has changed India’s growth figures significantly upwards almost overnight creating a lot of noise amongst economists and statisticians in the market.
Previously, at 2003-04 base year, GDP was computed at factor cost. The new series with the base year 2011-12 is computed at gross value added. The new method takes into account market prices paid by consumers against prices of products received by producers earlier.
Keeping Parity With Global GDP Measuring Standards, India Now Calculates GDP at Market Prices
The headline numbers as released then showed India growing at a pace close to China against the previous methodology which showed expansion at a much slower rate. The revised calculation at market prices also incorporated more comprehensive data on corporate activity and newer surveys of spending by households and informal businesses. The new series had led to about 40 basis points upswing in GDP. However, it was not actually true that the series has gone up by 2 percent or more. The growth rates depict some differences, although not significant, and this is largely due to the ‘discrepancy’ variable, which is found to be highly volatile. There is another reason why differences in growth rates are not so critical and that relates to the opportunities being created as a result of the fundamental reorganization that India’s fiscal economy is undergoing at this juncture.
The Rationale Behind the CSO Method
Although initially, other indicators reflected the economy operating at below capacity, the new methodology is globally more comparable as it takes into account a far greater representation of the Indian economy and is more reflective of the real state of Indian economy.Share of industry has gone up while share of services has shrunk.
According to the central statistics office, the primary reason why the new series threw higher estimates of manufacturing sector’s size and growth, was the shift from the Annual Survey of Industries (ASI) to the corporate sector database. ASI data purportedly captures only the value-addition at the factory-level and fails to account for other activities such as sales, and research and development.
However, questions also rose relating the ASI database since corporate activity and consumer prices data sourcing was from firms’ annual accounts filed with the Ministry of Corporate Affairs (MCA) but of course non-availability of data before 2006-07 in the MCA database was an important bottleneck.
Despite controversies, and a lot of criticisms by political players as well as market practitioners, we think that the new series being calculated at market prices captures a better picture of the real economy making it more in line with global standards. Base year revisions usually tend to bring figures closer to the actual, reducing discrepancies and with the back series out now, the data shows fewer disparities in terms of growth rates.
Intueri is a broad-based strategy and business consulting firm engaged in multi-disciplinary, holistic, and avant-garde business solutions designed to steer growth for enterprises of any size and belonging to any industry. With a world-class team of industry professionals and in-depth business acumen combined with global alliances, Intueri supplies corporate leaders with cutting-edge, research-led business insights, enabling them to streamline their organizational strategies, address the fast-changing market requirements, and boost overall performance improvement in an ever-competitive space.
Purpose of this research: We dive into extensive research on different business verticals with the mission to engage general audience and firms with the latest and in-depth overviews of these verticals so as to assist them in steering their businesses through a much knowledge and research-based approach. This research, we feel, connects best to SMEs looking to comprehend the sector details, its schemes, and the existing scenario. We also feel that this in-depth article diving deep into industry size, challenges, and strategic solution outlines of the issues—would also serve best to students, researchers, and other professionals belonging to the agricultural and food processing industry.
India is the world’s largest agrarian economy with 14.35% contribution to GDP. It is also the world’s 3rd largest producer of food. A bumper harvest of winter crops and higher production in livestock and fisheries sectors aided a 5.3% growth in agriculture GDP in the first quarter of 2018-19, up from 3% in the same period last year. Production of rice, wheat, coarse cereals and pulses registered growth rates of 15%, 1.2%, 15.6% and 17.3%, respectively, during the Rabi or winter season in the agricultural crop year of 2018-19. About 45% of the gross value added or GVA in the agriculture sector was contributed by livestock, forestry and fisheries, which registered a combined growth rate of 8.1% in the first quarter of 2018-19. Agriculture GDP grew at 3.4% in 2017-18, lower than 6.3% in the previous year.
Food processing sector is indispensable for the overall development of an economy as it provides a vital linkage and synergy between the agriculture and industry. It helps to diversify and commercialize farming; enhance income of farmers; create markets for export of agro foods as well as generate greater employment opportunities. Through the presence of such industries, a wider range of food products could be sold and distributed to the distant locations. The term ‘food processing’ is mainly defined as a process of value addition to the agricultural or horticultural produce by various methods like grading, sorting and packaging.
The Global Processed Food Industry is valued at US $ 3.2 trillion and accounts for over 3/4th of global food sales. Despite the large size of the industry, only 6% of the processed food is traded the world over as compared to bulk agricultural commodities where 16% of produce is traded. Growth of the sector has been the highest in developed economies, especially across Western Europe, North America, Japan and Australia. USA is the single largest consumer of processed food and accounts for 31% of global sales. The food processing sector has seen substantial growth in developing economies with increase in GDP, per capita income and the resultant changes in lifestyle.
The Indian food processing industry stands at $135 billion and is estimated to grow with a CAGR of 10 per cent to reach $200 billion by 2015. The food processing industry contributed 7% to India‘s GDP. The industry employs around 13 million workers directly and about 35 million indirectly. The industry is segmented into sectors namely, milk and allied products (dairy), meat and poultry, seafood, bakery and confectionery, fruit and vegetables, grain, pulses and oilseeds (staple) products, alcoholic and non-alcoholic products (beverages), and packaged foods. The classification is not distinct as many processed products overlaps different segments.
India has the second largest arable land of 161 million hectares and has the highest acreage under irrigation. Next to China, India ranks second largest food producer in the world and has the potential to immerge the biggest with its food and agricultural sector. India has diverse agro-climatic conditions and has a large and diverse raw material base suitable for food processing companies. Its strategic geographic location (proximity of India to markets in Europe and Far East, South East and West Asia) provides a lot of inherent advantages to the country.
In food and agro processing sector, West Bengal is one of the three front running states in India.Fruits, Vegetables and Cereals grave in abundance in West Bengal. The state accounts 30% of potatoes, 27% pineapples, 12% of bananas and 16% of India’s rice production. Additionally, fruits like mangoes, papayas, guava and jackfruit and vegetables like tomatoes, cauliflowers cabbage, eggplant and pumpkin are available in plenty. Thus, West Bengal in terms of agriculture is the largest producer of rice, pineapple, vegetables and fruits in the country, second largest producer of potatoes and lychees.
Agro and food processing industries form a very important part of the state’s economy. The West Bengal government is setting up a number of policies and plans to focus on the selected areas like vegetables, fruits, fisheries, rice, poultry, dairy and floriculture. Some of these plans includes more money involvement in agriculture, encourage private entrepreneurship for processing of fruits, vegetables & horticulture items etc. The State Govt. is encouraging the farmers for mechanization through the use of modern agriculture implements and machines form timely farm operation and reduction in the cost of production.
In the state, the main processed products in the Fruits and vegetables category are jams, jellies, pickles, sauce, canned sliced fruits and squash.
Agro Food parks are being developed in the state with the intention of providing support to small & medium entrepreneurs by assisting them financially in setting up capital intensive facilities like cold storages, warehouses, quality control labs, effluent treatment plants etc.
Challenges faced by the Industry
High level of wastage of agricultural produces is primarily on account of the inherent disadvantages faced by the sector. This sector is characterized by preponderance of small farmers, small scale & tiny processors, outdated technology, poor infrastructure and a maze of middle men. Therefore, this sector needs support in terms of creation and strengthening of infrastructure which individual farmers and processors will not be in a position to create and sustain. Further, there is also a need for strengthening R&D activities in food processing sector for innovation of technology which suits localneeds, popularization of appropriate technology, skill development and creation of an institutional framework supportive of the industry. The major challenges are investments at different points of the supply and value chain, proper research, farm and lab connectivity, upgradation of technology, increase in farm holding, skill and manpower training, backend and front-end integration and cold chain integration.
Agro and Food Processing Clusters
Pradhan Mantri KisanSampada Yojana is a flagship programme of the Indian Government for boosting investment in food processing. Rs 1313.08 crore has been allocated in the current budget 2018-19. This scheme is expected to benefit two million farmers and generate 530,500 direct and indirect jobs in the country by 2019-20.In 2016, the ministry had introduced an umbrella Scheme Called “Agro-Marine Processing and Development of Agro-Processing Clusters” or SAMPADA, which was proposed to be implemented with an allocation of Rs 6,000 crore for the period of 2016-20.In September 2017, the ministry released a notice on renaming SAMPADA scheme. The schemes that were to be implemented under SAMPADA will now come under “Pradhan Mantri Kisan SAMPADA Yojana”. Under SAMPADA, the general areas would get 50 per cent of the project cost as grant-in-aid and the hilly and remote areas like the north-eastern region would receive 75 per cent of the project cost.
The scheme aims at development of modern infrastructure and common facilities to encourage group of entrepreneurs to set up food processing units based on cluster approach by linking groups of producers/ farmers to the processors and markets through well-equipped supply chain with modern infrastructure. Each agro processing clusters under the scheme have two basic components i.e. Basic Enabling Infrastructure (roads, water supply, power supply, drainage, ETP etc.), Core Infrastructure/ Common facilities (ware houses, cold storages, IQF, tetra pack, sorting, grading etc) and at least 5 food processing units with a minimum investment of Rs. 25 crores. The units are set up simultaneous along with creation of common infrastructure. At least 10 acres of land is required to be arranged either by purchase or on lease for at least 50 years for setting up of Agro Processing Cluster.Agro processing clusters are set up by Project Execution Agency (PEA)/ Organisation such as Govt./ PSUs/ Joint Ventures/ NGOs/ Cooperatives/ SHGs/ FPOs/ Private Sector/ individuals etc. and are eligible for financial assistance and subsidies subject to terms and conditions under the scheme guidelines.
The following schemes will be implemented under PM Kisan SAMPADA Yojana:
Mega Food Parks
Integrated Cold Chain and Value Addition Infrastructure
Creation/ Expansion of Food Processing/ Preservation Capacities (Unit Scheme)
Infrastructure for Agro-processing Clusters
Creation of Backward and Forward Linkages
Food Safety and Quality Assurance Infrastructure
Human Resources and Institutions
All states apply for creation of infrastructure under this scheme. West Bengal submitting 6 applications as on August 2018. However, none have been approved. 13 mega food parks have been operationalised in states such as Karnataka (Tumkur), Punjab (Fazilka), West Bengal (Murshidabad), etc. in the last four years. These mega food parks have generated Rs 3,34,854 jobs in four years and benefited 20,725 farmers. Additional 15 mega food parks will be operational by end of the fiscal, creating jobs for around 4 lakh persons. With regard to cold chain and value-added infrastructure, 85 projects have been operationalised during the past four years. However, the mega food park at Jangipur in Murshidabad has encountered operational challenges as a result of the state government’s apathy in investing Rs 1 crore in the project. The unit is facing some issues but intervention by the State can resolve them. Majority of the funds are being taken away by Maharashtra, Gujarat, Andhra Pradesh and Karnataka. Under the scheme we have a quota for each State. There have been so many proposals from Maharashtra, Gujarat, Andhra Pradesh and others, but none has been received from Bengal.
Funding Agro Processing Clusters
The NBFC, which is likely to be named Agro-Processing Financial Institution would exclusively cater to the needs of the food processing sector and is expected to be operational by the year-end. It would entail an investment of about Rs. 2,000 crores. The government will pick up 20-per cent entity and invest a seed fund of close to Rs. 400 crores. The remaining will come from the private sector. While there is a huge growth potential for the sector, access to bank funds has been difficult. This is primarily because banks fail to understand the risk assessment. Only about 10 per cent of India’s farm produce is currently processed as against 60-70 per cent globally, leading to huge wastages. Other than this, funding support is provided by NABARD.
According to NABARD, during the five-year period of 2011-12-2016-17, the ground level credit under the priority sector has grown 3 times from Rs. 28602 crores to Rs. 86045 crores. The outreach of the banking sector has been increasing including credit absorption of the State. The potential estimated for agro and food processing sector is Rs. 2896.76 crores which includes units of grain processing, fruits and vegetables processing, edible oil extraction, dairy products and fish and meat items.
Being a surplus production State for both perishable and non-perishable agricultural produces, adequate storage infrastructure facilities is very important. As of now, 459 cold storages with a combined capacity of 76 lakh MT, of which 54.45 lakh MT storage capacity is only for potatoes (400 potato cold storages and 59 multipurpose cold storage units) are operating in the State. This wide gap in storage infrastructure against the requirement opens up opportunities for both public and private investment to create post-harvest infrastructure for agricultural produces.
The State Government has identified 6 agri-export zones in the State, Malda for Mango and Litchi, Siliguri for Pineapple, Hooghly for Potato, North 24 Parganas for vegetables and Darjeeling for Tea to provide target-oriented boost to production of such crops wherein the State has inherent advantages. 12 food parks are currently being set up in the State. Packing houses and multipurpose cold storages are also being built.
Export of Agricultural Products
West Bengal is a predominantly agrarian state with agriculture contributing 18.8% to the State’s GSDP in 2014-15. It is one of the major producers of food in India having a strong agri-horticultural resource base for a thriving food processing industry. The state is abundant in perennial rivers and large water bodies and coastal areas which is suitable for pisciculture and marine fish production. The state has favourable agro-climatic conditions with six agro-climatic zones conducive for cultivation of a multitude of crops, vegetables and fruits round the year. Paddy, wheat and jute are the major crops produced in West Bengal. The state is a major producer of fruits (such as Mango, Pineapple, Litchi, Mandarin Orange, and Guava) and vegetables (such as Tomato, Cabbage, Cauliflower, Brinjal, Cucurbits and Okra). Major spices produced are Ginger, Chilli, Turmeric, Garlic and Coriander. The state also has a large and vibrant livestock population significantly contributing towards the production of Milk, Eggs, Fish and Meat. As of 2015-16, the State has a total production of 17,776 thousand tonnes of food grains,the total production of fruit stands at 3,517 thousand tonnes. The State is the 2ndlargest producer of vegetables in India with a total production of 22,825.45 thousand tonnes. West Bengal Ranks 1 in production of Brinjal and Cabbage; Ranks 2 in production of Potato. It isthe 2nd largest producer of Fish and Meat, 2ndlargest producer of Tea and the largest producer of Jute in the country.
The major production clusters include-
West Medinipur, Bardhaman, Birbhum, Murshidabad-Paddy
Nadia, North 24 Parganas, Hooghly, Murshidabad-Banana
Murshidabad, Nadia, Birbhum, Malda-Wheat
Malda, Murshidabad, North 24 Parganas-Mango
Malda, Murshidabad, Nadia, Bankura-Brinjal
Darjeeling, North Dinajpur, Jalpaiguri-Pineapple
Murshidabad, Nadia, South 24 Parganas-Cabbage
North 24 Parganas, South 24 Parganas, Nadia-Papaya
West Medinipur, Hooghly, Bardhaman-Potato
Murshidabad, Nadia, Malda-Litchi
Nadia, North 24 Parganas, Murshidabad-Jute
Darjeeling, Jalpaiguri, Coochbehar, North Dinajpur-Tea
Bardhaman, Jalpaiguri, Murshidabad-Milk
Darjeeling, Birbhum, Murshidabad-Eggs
Bardhaman, Jalpaiguri, North 24 Parganas-Meat
As per the Annual Survey of Industries- 2014-15, there are 1, 808 registered food processing units in the state.
Some of the major processing clusters in the state include–
Bardhaman; Jalpaiguri; Hooghly-Rice Milling
Old Malda; Nadia; South 24 Parganas; Howrah-Honey Processing
Bijanbari, Darjeeling; Kolkata; Malda; South 24 Parganas-Bee Keeping
Dinhata, Coochbehar; Beldanga, Murshidabad; Chapra, Nadia; Kaliagunj, North Dinajpur-Mustard Oil
Howrah; Malda; Kolkata; Darjeeling-Food Processing and Preservation
Cannel East Road, Kolkata; Kaliagunj, North Dinajpur; Ultadanga, North 24 Parganas-Pulse Milling
Hooghly; Kolkata; Nadia; Bardhaman-Dairy
At 5.9 mn tonnes installed capacity, the cold storage capacity in West Bengal is the 2nd largest in India. Further, the state has nine cold chain units under MoFPI, and 15 major clusters.
Thus, being such an agri-producing hub of the nation, much of it is also exported. Recently, mangoes are being considered for export to Europe. Vegetables, Tea, coffee, spices, fish cereals, are some of the exporting items. A lot of this is exported to Bangladesh. West Bengal’s top export destinations are mentioned below which covers both agricultural as well as other products.
There exists a lot more potential and opportunity for the State to expand its export market. Being an agrarian economy, it thrives in production of food items. Like various other ways, formation of clusters is an important method for enabling better production mechanisms and gathering fund support. This could further facilitate marketing and reach of the products both domestically and internationally.
Thus, we note that although Bengal has such a diverse and rich cultivation base along with the developing infrastructure for creating processing units and clusters which is a step forward in the food chain, infrastructure development for the same and awareness amongst farmers are yet quite low. The Centre provided scheme for agro-processing industries are not being explored much by West Bengal farmers and processing units. The scheme provides financial support and subsidy to encourage production. Processing of raw food into packaged ones would enable capturing an even bigger market. In this context, designing a recommendation strategy to suggest how this can be facilitated and what would be the benefits of it would be the focus area. Alongside, an export plan for agricultural produces of the State could also be prepared which would identify and highlight the potential markets and increased volumes of exports in a export earning model.
Potential for Bengal
As described above, it is clear that there exists a huge scope for boosting this sector. Based on our research we identified certain areas, addressing which could help achieve better results in agro production and processing industry.
Encourage alternative farming and diversification of agriculture– Growing dependence on potato cultivation and inadequate (55%) storage facilities for the same is diverting attention towards opting production of other items like pulses and lowering reliance on potato. Also, 90% of the potato grown are of table variety. There is a need to allow diverse varieties of potato production. This would lower risk of wastage of potato and generate revenues from another shifting crop production as well.
Increase farmer income– Facilitate better credit facility and improve infrastructure including transport, cold storage facilities, irrigation, etc. Around 95% farming households are formed by small, marginal and share cropper farmers. They lack financial support to adopt enhanced farming techniques and market their products.
Post-harvest management-One of the biggest challenges that lies with perishable agricultural items is that of wastage and crop loss. This is prevented with the help of suitable post-harvest management techniques which provides enough storage, curing, drying and infrastructural facilities. Suggesting proper measures of post-harvest operations and cold chain infrastructure to ensure minimum loss of fruits and vegetables would be the focus in this section.
Enhanced promotion of agri business-With increasing pressure on farmers and agri business to be more profitable and competitive. This requires better management, decision-making, improving the efficiency of resource use, and strong marketing. In order to enable this, specialised agribusinesses such as extension and advisory services, consulting and input services, marketing and trade organisations, and those bringing the benefits of the latest information and communication technology to agriculture and the rural economy is required.
Ex-portability of agricultural items– Given the inherent conducive natural soil, climate and terrain, the production is of superior export quality and in surplus quantities. This provides ample scope to explore the overseas market for exporting items. By identifying suitable markets for such commodities expansion in exports could be further facilitated.
Key take away from the article:
The highlight, therefore, remains to increase cultivation, reduce losses, generate revenues and capture a larger market. Alongside, identify means to provide financial assistance and credit facility to help farmers in mechanized farming with the use of infrastructural facilities. Also, look for newer options such as post-harvest management, value chain management and finally exportability of commodities with an aim to increase income utilizing central schemes and receiving input benefits like subsidies for production and cluster formation.
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Indian tea production for 2016 (Jan-Dec) was marginally up by 2.5% to 1239.15 million kg as compare to 1208.66 million kg in 2015. In 2016, Assam had produced 642.18 million kg in comparison to 631.22 million kg in 2015. In West Bengal too, production has gone up to 357.47 million kg in comparison to 324.5 million kg in 2015. South Indian tea production was also up from 212.21 million kg in 2015 to 227.57 million kg in 2016.
Although, production of tea in India has risen, exports have taken a hit. Exports have dropped by 2.46% in the period January to November 2016, according to Tea Board data. In the first 11 months India has exported 197.01 million kg of tea in comparison to 202.12 million kg in the same period last year. Indian tea has been facing stiff competition in the world market from Kenyan tea in 2016. Kenya had produced 73 million kg more teas in 2016.
West Bengal comes at the second position in the list of tea producing states with 329.70 million kilograms of tea production in the year 2015-16, which is roughly 26% of the national produce. Districts of Darjeeling, Jalpaiguri and Coochbehar are the major tea producers of the state.
Global Tea Industry Scenario
World tea production (black, green, instant and other) increased by 4.4 percent annually over the last decade to reach 5.73 million tonnes in 2016. China was responsible for the accelerated growth in global tea output, as production in the country more than doubled from 1.17 million tonnes in 2007 to 2.44 million tonnes in 2016. China accounted for 42.6 percent of world tea production, with an output of 2.44 million tonnes in 2016; production in India, the second largest producer, increased to a record high of 1.27 million tonnes, due to favourable weather conditions. Output in the two largest exporting countries, Kenya and Sri Lanka, reached 475 300 tonnes and 295 300 tonnes, respectively. Production in Kenya increased by 18.0 percent, while in Sri Lanka it declined by 11.0 percent.
World tea exports increased annually by 1.4 percent over the last decade to reach 1.75 million tonnes in 2016, underpinned by larger shipments from Kenya, with exports reaching a record level of 436 924 tonnes in 2016, a 16.0 percent increase from 2015, as well as a strong annual growth of 3.4 percent in green tea exports (compared to the annual growth of black tea exports of 1.0 percent). Lower annual growth in exports was recorded by China and India, as larger portions of tea were consumed domestically.
The main determinant for growth of the global tea economy is demand for the commodity. Several factors influence the demand for tea, including the traditional price and income variables and demographics such as age, education, occupation and cultural background. Other main drivers of international tea prices are market access, the potential effects of pests, diseases and weather conditions on production and changing dynamics among retailers, wholesalers and multinationals.
Challenges faced by West Bengal Tea Sector
Small tea growers (STG) of Terai and Duars have certain internal and external issues to deal with. Some of the major ones are:
Low price of green leaf– There is absence of fair price of the green leaves produced by the small growers. The STGs do not possess their own processing unit; and have to sell their production to the big tea estates or BLFs where price is entirely decided by the large grower or BLF.
Highly perishable- Green leaf is a perishable product which needs to be processed within twelve hours of plucking. Therefore, the STGs compel to take the price whatever offer by the factory owners.
Financial problems– Entire cultivation is dependent on private initiative of individual owners. Institutional finance to this sector is very less. Due to lack of ownership of land, non-registration of tea gardens, etc. the institutional finance and help from Government authorities and agencies is not enjoyed by this sector and therefore growth is hindered.
Lack of technical knowledge and marketing– It was noted that most of the small tea growers are not technically sound and having lack of proper knowledge in the field of tea cultivation. These unskilled cultivators are facing problem in certain areas like- pest management, menu ring, drainage system etc. that are most essential for the growth and development of this sector. Alongside, In the absence of proper marketing channel of green leaf, the small tea sector has to depend on the buyers, like large tea garden owners, BLFs, etc. Due to asymmetric market information, absence of proper storage facilities and transportation, price of green leaf drops.
Policy recommendations– STG are a major economic force within the tea industry. This industry could build the socio-economic structure of the rural people. Sincere effort is needed from the Government side and look these small tea gardens a new development initiative for the state.
Certain other problem areas include workers unrest due to hiking of wages, political and social hindrances. Of late, daily wage hike have been drawing much attention with protests from tea garden workers on increasing daily wages by Rs. 17.50 from Rs. 132.50 to Rs. 150. They are also striving for a minimum pay to be settled by the State government. This issue has led to several strikes and protests causing unrest in the tea plantations. Another important focus area is working conditions for women in the plantations. Women face many social, economic and health related problems like poor health care facility, maternal mortality, problems of epidemics of various diseases, scarcity of drinking water, illiteracy, superstition belief and alike.
Markets for Indian and West Bengal Tea
Indian tea industry has recorded the highest ever production as well as exports in FY 2018. The total tea production was 1325.05 million kgs, an increase of 74.56 million kgs as compared to 2016-17. In percentage terms the increase is around 6%. Similarly, the total quantity of tea exported during the financial year 2017-18 stood at 256.57 million kgs, while the foreign exchange realized from exports of Indian tea was $ 785.92 million. The growth in exports was majorly driven by the following countries: Egypt (increased by 7.49 million kgs), Iran (increased by 6.95 million kgs), Pakistan (increased by 4.96 million kgs), China (increased by 2.91 million kgs) and Russia (increased by 2.89 million kgs). In this respect, around 8 million kg of this premium agricultural produce is grown on the slopes of the eastern Himalayas in some 87 gardens spread over 17,500 acres. Apart from EU nations like Germany, Japan and US are the important export markets for Darjeeling tea. According to Tea Board of India, production of high-value orthodox tea and green tea increased during 2017-18. These teas are in great demand in high value markets such as Iran, Germany and Japan.
Latest Developments in the Indian Tea Industry
In line with Government’s stated policy of laying emphasis on sustained export promotion in order to maintain supply-demand balance as well as earn higher price realization for the Indian tea industry five targeted highly potential markets have been identified. The programme ‘Project 5-5-5’ would cover five strategically important markets viz. U.S.A., Russia, Kazakhstan, Iran and Egypt for extensive & intensive promotional intervention through implementation of five specific activities over five years through dedicated funding. The above countries were selected based on the parameters of “Market Attractiveness & Potentiality” and “Ability to compete by the Indian Tea Industry”. The foremost objective of the entire exercise is to position “Indian Tea” as an over-arching umbrella brand under which five identified promotional activities would be designed, coordinated and implemented through reinforcing “Brand India” connect amongst the target trade and consumers.
The schemes under this include:
Scheme for participation in International fairs and exhibitions with Tea Board
Scheme for promotional support to Tea Associations
Promotion Scheme for Packaged Teas of Indian Origin (Brand Support)
The broad framework of envisaged five activities is given below:
Extensive promotion of India Tea Logo (familiarization/creating awareness) through
publicity in print media (articles, stories, editorials etc.)
billboards/hoardings at strategic locations
Engagement with the local trading community
Participation in Trade fairs/Tea festivals
Exchange of business delegations
Sponsorship of national/regional trade events
In-store promotion at point-of-purchase (free sampling with free merchandising)
Utilisation of Social Media
Connect with the consumers (Online fora/communities, Social networks like Facebook, Twitter, Blogs, Viral videos, Multimedia sharing etc) for online conversations through continuous engagement
Feedback from them (Viral videos, Twitter, Blogs)
Focus on export of value-added teas
Equipment & Machineries
Technical skills to impart
Also, under overseas promotion scheme, it is proposed to promote Darjeeling, Assam, Nilgiri & Kangra teas and the respective logos among consumers with a view to building equity for Indian tea in international markets. Promotion would be undertaken with inputs and advice from the Industry. Promotion of India teas are proposed to be undertaken in the overseas markets through road shows, participation in trade fairs & exhibitions, generic as well as speciality tea campaign through Tea Council in U.S.A., participation in fairs & exhibitions, trade facilitation through arranging Buyer- Seller Meets, exchange of trade delegations (inbound & outbound), information dissemination through gathering of market intelligence, protection and promotion of various intellectual properties of the Board (Darjeeling GI, Assam (Orthodox) GI, Nilgiri (Orthodox) GI etc). Membership through Tea Councils in USA and Canada also contribute to promotion of Indian tea in the respective markets.
In another latest development on trade between India and China amidst the looming US-China trade war, The Tea Board has pitched for a preferential trade agreement between China and India to boost exports of black tea and imports of green tea. The duties at present were extremely prohibitive which was restricting exports from both the countries and hence needs to be lowered. 80% of China’s annual tea production is green tea and 18% Oolong variety, while 98% of the beverage produced in India annually is black tea. China’s annual production was 2600 million kilograms, while India’s was half of that. India exports around 7-8 million kg of tea to China, while the latter’s exports of green tea to India was not significant. About non-tariff barriers in both the sides, there should be harmonisation of maximum residue limit for different pesticides by both the countries. Consensus on this is yet to be reached.
by Antara Mukherjee, Head of Research, Intueri Consulting LLP
South Asia region comprising of India, Afghanistan, Nepal, Bhutan, Bangladesh, Maldives, Pakistan and Sri Lanka (member countries of SAARC and falling under the SAFTA agreement) continues to exhibit strong growth despite some slowdown in 2016 (6.7%) and 2017 (6.5%). The outlook remains robust primarily backed by healthy domestic demand. In 2018, growth is estimated to accelerate (7.1%)[i], except in Nepal, reflecting continued strength in consumption and investment supported by favourable financial conditions and improving external demand. Short-term risks are largely balanced however, medium term downside risks of other macroeconomic vulnerabilities continue to weigh on the region. Fiscal deficit and public debt are on the higher side than most comparator regions. Alongside, policy uncertainties and potential geopolitical tensions globally could also hurt foreign investments and trade thereby deterring pace of economic activity and growth. Global trade volume grew at the fastest pace in six years in 2017 at 4.7%. The next couple of years are expected to see strong merchandise trade growth but is largely dependent on suitable monetary and fiscal policies by the countries.
Global trade has been expanding rapidly on stronger economic growth across regions, led by increased investment and fiscal expansion. But the escalating trade tensions are likely to moderate trade growth in the near future. WTO anticipates trade growth at 4.0% in 2019. Trade amongst the major economies of the world namely, US, China, EU are facing competition on tariffs and this could lead to a cascading effect on other countries and market players. The mounting tightness in the international market would invite developing countries to derive benefits out of the stiff competition between the two super powers of the world. Today, India is also imposing tariffs on US imports. Retaliation of tariff imposition between nations could eventually lead to deviation in trade dynamics across the globe. In such a scenario, higher reliance on neighbouring and nations within a bloc or region is likely to gain importance creating integration among them. The shift in focus from Trump’s protectionism policies would throw light on the other emerging bloc of the world-South or Southeast Asia. Due to several factors on the domestic, external as well as uncertainties in the developed nations, this part of Asia is gaining significance. Another crucial development is the efforts towards cross border infrastructure development through various initiatives such as BBIN MVA, BIMSTEC and alike.
Thus, the rising focus of South and/or Southeast Asia is drawing attention of investors and market players to enhance its trade, infrastructure, economic fundamentals and overall cooperation and homogenization. Studies are being held on the various aspects of this region’s development and intra-regional trade and its growth opportunities is a prime concern, especially in the current situation of trade and tariffs all over the world.
South Asia trade with the world-
(Source: World Bank WDI. Note: Data is in current prices, US$ billions)
(Source: World Bank WDI. Note: Data is in current prices, US$ billions)
World exports in 2017 stood at around US$ 17.8 trillion, rising from around $ 16.1 trillion in the previous year. Imports also increased to US$ 18.1 trillion from US$ 16.2 trillion in 2016. Trade deficit therefore came in at US$ 0.3 trillion (US$ 253.1 billion) while total trade expanded to US$ 36 trillion in 2017. South Asian total trade is about 2.7% of the world’s total trade. With a strong economic outlook and stable macroeconomic fundamentals, historical political tensions, trust deficit, cross-border conflicts and security concerns contribute to a low-level equilibrium. At present, intra-regional trade contributes only 5% of South Asia’s total trade compared to 25% in ASEAN. For instance, it is 20% cheaper for India to trade with Brazil than Pakistan. In this situation, greater regional economic integration could reduce trade frictions and enable significant gains for the countries.
South Asia lacks regional integration and requires major investment push along with boost to travel and tourism. Economic growth in the region is being deterred due to this. It is one of the least integrated regions of the world. Trade between the SAARC countries is also limited as compared to the developed nations. In fact, SAARC nations trade more with other countries like the US and Europe than their neighbouring countries. For instance, we consider India’s trade pattern. Major trading partners of India are given below which shows that among the top 10 trading partners only Indonesia features in 8th position from the south east region. None of the SAARC nations are in the list.
India’s trade with its major partners
CHINA P RP
U S A
U ARAB EMTS
Total of Top countries
(Source: Ministry of Commerce, Government of India. Note: Data is in US$ billions for 2017-18)
The table above represents top trading partners of India in terms of total trade. China tops the list,
followed by USA and UAE. However, highest exports go to the USA and imports is from China. India’s AAGR between 2007-2017 is 7.4%.
India’s exports to ASEAN grew 10.5% annually in 2017-18 to US$34.2 billion from US$30.9 billion while imports registered a growth of 16.0% in the same period to US$47.1 billion from US$ 0.6 billion. Total trade between India and ASEAN therefore stood at US$81.3 billion. Despite Indo-ASEAN FTA there is not much progress in terms of full potential trade. RCEP is expected to increase trade between India and ASEAN nations further and explore potential trading opportunities. India trade with RCEP in 2017-18 was at US$226.4 billion with exports at US$ 61.1 billion and imports at US$165.3 billion. With 644 million population and combined GDP of $2.7 trillion, ASEAN is a large economy. Combining India and ASEAN together, it is nearly a US$5 trillion economy, the 3rd largest in the world after the US and China. Given this, both India and ASEAN are very important for each other.
A very significant reason for this is the growing influence of China in international market. China over the years has remained the main driver of trade in Asia. Asia has been contributing much to the global trade with rising trade share with the US and EU. However, a large part of intraregional trade is linked to external demand. This is evident particularly in Southeast Asian region including SAARC nations. China’s dominance in trade hinders volume trade between neighbouring trading partners like India-Bangladesh or India-Pakistan and alike. When we take a look at China’s trade profile, China alone trades around US$ 80.9bn with South Asia depicting that the nation eats up much into other medium to smaller sized countries share of trade in this region. To note an interesting phenomenon here is that Asia’s regional integration remains buoyant with trade share rising (57.3% in 2016 from 56.9% in 2015). For sub-regions of Central Asia, East Asia, South Asia, and the Pacific and Oceania, intra-sub-regional trade rose in 2016 from 2015, while Southeast Asia’s fell. The slight decline in Southeast Asia’s intra-sub regional trade share (from 23.3% to 22.8%) was mainly due to the rise in the share of the People’s Republic of China (China) and the Republic of Korea in the subregion’s trade. The share of the United States (US) and EU also increased slightly. Evidently, South Asia continued to have the lowest share. The top 10 trading partners of China as on 2016 are as follows-
Trade balance (US$ billion)
Hong Kong, China
United Arab Emirates
Similarly, looking at South East Asian region which primarily includes ASEAN, Regional Comprehensive Economic Partnership [RCEP] (under negotiations) we observe the falling share in intra-regional (intra-ASEAN) as cited above. The trade figures are given below. RCEP as we know is ASEAN + 6 [ i.e. Australia, China, Japan, Korea and New Zealand].
Total trade in goods
(Source: ASEAN Economic Integration Brief June 2018. Note: Data is in US$ billions)
Trade of the RCEP region with the world would be capturing a significant portion of global trade given its composition. In the current situation, by summing individual country’s export and import, RCEP bloc stands at a total trade of US$ 9639.5bn. Given below is a profile of the same.
(Source: UN COMTRADE and author’s calculations. Note: Data is in US$ billions)
Another important cause for lower integration between the SAARC nations is similarity in endowment of the bigger countries in this bloc. For instance, India is the largest economy followed by Pakistan and Bangladesh. If we look at their resources, endowment and their trade basket it would largely be similar given comparative advantage of these nations being mostly identical. Due to this, trade between these countries are more limited as their requirements are broadly same which would be supplied by nations elsewhere. This also leads to lower regional integration in trade in the SAARC bloc.
Thus, as we perceive the changing dynamics of the international trade markets, focus on the eastern part of the world is ever increasing. Geopolitical and trade turmoil on the west are shifting reliance to Asia in particular. Major economies of the South and Southeast Asia have been developing on stronger fundamentals with dependence on external sector demand. Even though, most of the external demand is fulfilled by trade with the US, EU and China but with continuous efforts to strengthen connectivity and cross-border infrastructure integration among the countries in a sub-region or bloc is seen to improve. Also, with several treaties, initiatives and negotiations being undertaken by the policymakers of the different nations it is hopeful that regional cooperation would be enhancing and trade within the region would increase.
Amidst growing trade negotiations and tariff competition across the world with existing tariff barriers and free trade agreements between two or more countries, non-tariff barriers (NTB) have also gained importance. To the extent that significant domestic protection is assured with the help of NTBs including quotas, embargoes, sanctions, levies and other forms of restrictions. With existing tariff impositions on goods under different categories, hidden protectionism has been rising over the years. Post the dramatic collapse of international trade in the wake of the financial crisis in 2007-08, fears developed that governments may respond to domestic economic challenges by increasing tariffs and other trade barriers to protect their economies. Such uncoordinated trade policy would eventually lead to a slow down in economic growth. One big difference in how countries reacted to the recent global financial crisis of the 21st century in contrast to the crises of the last century has been a stronger cooperation in international trade policies under the shelter of the WTO that has successfully prohibited a surge in border tariffs. Under the WTO regime, across countries tariffs have been on the decline even though the levels of Most Preferred Nations (MNF) tariffs differ substantially. The changing dynamics of trade patterns under the influence of decreasing custom duties and rising trade protection being fulfilled not in the form of tariffs but alternative tariff restriction measures were also adopted under the WTO rules.
NTBs since the global financial crash have been increasing with an aim to reduce imports. Since 2009, only 20% of all implemented protectionist interventions can be attributed to an increase in tariffs. In contrast, NTBs accounted for on average 55% of all implemented protectionist interventions. The usage of NTBs increased steadily relative to trade defence measures. While in 2010 only 54% of all protectionist interventions were NTBs the usage of NTBs increased to 61% in 2016. The usage NTBs is highly correlated with the income level of an economy. High income countries appear to use NTBs more often than low or middle-income countries. The United States implemented by far the largest number of NTBs. The two BRICS economies, India and Russia rank second and third among the countries that implemented the most NTBs. Also, Not only have NTBs been increasingly applied as trade restricting measures, but they also have had a significant import reducing effect. On average bilateral imports decrease in response to the implementation of at least one NTBs by 12%.
However, identification of NTBs remains a major challenge. Contrary to data on NTBs provided by other sources, the GTA database for example records only very few Sanitary and Phytosanitary (SPS) and Technical barriers to trade (TBT) measures. One reason for this pattern may stem from the fact that other sources like the WTO do not distinguish between NTBs and non-tariff measures. Different to NTBs, non-tariff measures do not necessarily have a protectionist character but could also liberalize trade.
Given this, we take note of the SAFTA agreement in the context of Southeast Asian trade and understand the role and significance of NTBs.
Non-tariff and Para-tariff barriers under SAFTA
The SAFTA Agreement, signed in 2004, entered into force on 1 January 2006 and the Trade Liberalization Programme commenced from 1 July 2006. The SAFTA Ministerial Council (SMC) has been established comprising Commerce Ministers of the Member States. To assist the SMC, a SAFTA Committee of Experts (SCOE) has been formed. The total cumulative exports under SAFTA since July 2006 have crossed US$ 3 billion. Data on intra-SAARC Trade flows is not being received from Member States regularly.
The Standing Committee at its Forty-first Session approved that a Special Meeting of SAFTA Committee of Experts be held after the Eighteenth SAARC Summit to consider the proposal put forward by the delegations from Bhutan, India, Maldives and Pakistan that peak tariff on all products may be reduced to 0 to 5% by the year 2020, excluding a small number of about 100 tariff lines which may still remain in the Sensitive Lists of Member States. Accordingly, a Special Meeting was held in Islamabad on 4 July 2015 to consider the above proposal. After discussions, the provisional/confirmed positions with regard to further trade liberalisation and reduction in the sensitive lists emerged as follows:
To Reduce Sensitive Lists up to
To reduce Tariff to
235 by 2030
0 to 5% by 2030
450 by 2030
0 to 5% by 2030
100 by 2020
0 to 5% by 2020
100 by 2020 (for NLDCs)
0 to 5% by 2020
100 by 2020
0 to 5% by 2020
500 by 2030
0 to 5% by 2030
100 by 2020
0 to 5% by 2020
To give position by October 2015 after consulting stakeholders
The SCOE at its First Meeting set up a Sub-Group on Non-Tariff Measures (NTMs) to address non-tariff barriers to intra-regional trade. Six meetings of the Sub-Group were held. At its last meeting on 11-12 June 2011 in the Maldives, the Sub Group completed its task of identification of Non-Tariff Measures/Para Tariff Measures (NTMs/PTMs). It was agreed that the remaining task of categorisation of NTMs/PTMs and their possible elimination and to see whether they are compatible with WTO or not would be taken up by the regular Meetings of SCOE.
A Special Meeting of the SCOE on NTMs/PTMs was held at the SAARC Secretariat on 31 July-1 August 2013 in order to go through the Notification of each Member State and to see how those can be eliminated. The Special Meeting of the SCOE examined the Notifications, Responses and Counter-Responses submitted by Bangladesh, India, Nepal, Pakistan and Sri Lanka, and observed that the non-tariff measures and para-tariff measures affecting their exports to other Member States fall into the following broad categories i.e. (a) Procedures; (b) Variations in Standards; (c) Transit, transport and infrastructural difficulties; (d) Para-tariff measures; and (e) Dispute Settlement Mechanism. In view of technical nature of the work involved in categorizing the Non-Tariff Measures and Para-Tariff Measures in appropriate categories as per internationally recognized norms, the Meeting recommended that a Consultant may be appointed by the SAARC Secretariat to examine the notifications on NTMs/PTMs submitted by Member States and to look into all relevant aspects and make suggestions on how to address the trade barriers. The SAARC-Trade Promotion Network (TPN), comprising twenty-eight public and private sector organisations in eight Member States, has also brought out a detailed study on NTMs which was presented to the Ninth Meeting of SCOE (Thimphu, 22-23 July 2014). The Member States have also been requested to give their fresh Notifications on NTMs/PTMs as required under SAFTA Agreement.
The Sixth Meeting of the SMC (Islamabad, 16 February 2012) established a Working Group to further reduce the number of products in the Sensitive Lists under SAFTA. In its Second Meeting (SAARC Secretariat, 30 July 2013), the Working Group on Reduction in the Sensitive Lists under SAFTA (Phase-III) reviewed the progress of implementation of decisions relating to reduction in the Sensitive Lists as agreed during Phase-II. The current status of the number of products covered in the Sensitive Lists of Member States before and after the 20% or more reduction is as given below.
Number of Products in the original Sensitive Lists
Number of Products in the Revised Sensitive Lists (Phase-II)
Status of Receipt of Revised Sensitive Lists as per HS-2012
The Phase-II reduction in the Sensitive Lists has already been implemented by all Member States. The Third Meeting of Working Group on Reduction in the Sensitive Lists under SAFTA (Phase-III) was held in Islamabad on 6 July 2015. It considered the matter relating to further reduction in the Sensitive Lists under SAFTA (Phase-III). The delegations from Member States agreed to the following reduction in the products covered in their Sensitive Lists under Phase-III as given below. The delegation of Sri Lanka agreed to discuss the matter further with their stakeholders so that they could also agree to go beyond 10% reduction.
Global economy has been facing many challenges underpinned by risks related to trading environment. Tariff imposition by the US and retaliation by other major nations is likely impact global trade deteriorating the situation further for international trading markets. The other significant risk is policy normalization in advanced countries effecting capital flows mainly. Central banks are normalizing monetary policies on strong macroeconomic incoming data while credit conditions are tightening leading to short-term capital outflows from emerging economies. In this region, ASEAN economies are under pressure to adjust their monetary policies on accelerating capital outflows. However, given their strong fundamentals despite these emerging risks, the region is seen to remain resilient with steady growth driven by private consumption, strong investments in public infrastructure and robust exports.
Off recent times, rising geopolitical and international trade turmoil in the West is shifting focus on to the East of the globe. Economies of this side of the world are gaining importance based on their changing reform policies and strengthening domestic economy. To name a few, China, India, Japan, Singapore are standing on stable macroeconomic fundamentals. ASEAN member states have been adopting accommodative monetary policies coupled with fiscal initiatives which have strengthened the region’s economic credentials making it one of the rapid growing regions of the world. Developed economies are increasing relying on this region for investment and consumption markets. International policymakers are also eyeing growing dynamics of this part of the globe while prescribing policies and making decisions. In the light of these deliberations, it is crucial to take a look at the macroeconomic situation of the ASEAN region at present.
ASEAN GDP growth suggests that the region is losing momentum led by weakening external sector. The region grew by 5.2% on annual basis. The slowdown was primarily due to sluggish growth in Malaysia and Philippines. Net exports dragged growth in both economies offsetting stronger domestic demand. Thailand also lost some momentum on the back of slower government growth while Singapore economy dipped in Q2 on decelerating services sector although manufacturing sector continued its resilience. On the other hand, region’s heavy weight Indonesia, gained stem in Q2 negating much of the regional downturn. Firm domestic demand and healthy private consumption contributed to the improvement.
In this backdrop, we discuss the macroeconomic scenario of major countries of this region and their risks and outlook going forward.
INDONESIA | Stronger domestic demand to spur growth in 2018
Indonesian economy sustained its gradual growth momentum with GDP coming in at 5.3% y/y in Q2 2018. The rise was driven by sharp acceleration in government spending, while household spending rose moderately, and fixed investments grew slowly. Manufacturing PMI fell from a 26-month high of 51.9 in August to 50.7 in September on slower rise in output and new business. Industrial production growth increased to 4.9% y/y in August from 3.9% y/y in the month before. Business confidence data jumped to the highest since Q3 2009, at 112.8 in Q2 2018 from 106.3 in the previous quarter led by strong usage of production capacity and income expectations while consumer confidence rose to 122.4 in September from 121.6 in August. Production activity in the third quarter has started off on a positive note while consumption demand is moderate. Headline and core inflation moderated to 2.9% y/y and 2.8% y/y respectively in September from 3.2% y/y and 2.9%y/y in the previous month. The Central Bank raised key policy rates by 25bps to 5.50% to maintain stability in domestic financial markets and control current account deficit (CAD) within a desirable limit. The Government has been taking measurable steps to reduce the CAD by encouraging exports and lowering imports. Indonesia’s CAD in 2017 was 1.7% of its GDP which is expected to widen to 2.2% in the current year (ADB estimates). To reduce imports and strengthen currency, the Government announced a fiscal prudent 2019 budget in mid-August.
Growth is projected to gradually strengthen as government spending and investment pick up pace. Key risks to the country’s outlook stem from rising political noise ahead of the 2019 election or rising tensions on US-China trade. The ADB estimated GDP growth to rise by 5.3% in 2018 and 2019 respectively while inflation is forecasted at 3.8% in 2018 and 4.0% in 2019.
THAILAND | Domestic demand supports growth, external sector a drag
Economic growth eased to 4.6% y/y in Q2 2018, due to slagging external sector. Net exports contracted in the second quarter (0.4% y/y). Domestic demand continues to fuel growth with Private consumption expenditure rising by 4.5% y/y in Q2. Drag in government consumption and weaker inventories slower growth in the quarter. One of the key driving sectors, tourism, slowed to 9.1% in the quarter as compared to 15.4% in the previous one. Inflation remains modest at 1.3% y/y in September 2018 along with core inflation easing to 0.5% y/y. The accommodative monetary policy stance remains conducive to continued economic growth and targeted inflation of 2.5% average with a band of ± 1.5%. The policy rate has been left unchanged at 1.5% since 2015. Industrial production data suggests manufacturing activity is picking up although at the slow pace (1.5% y/y in August v/s 4.8% in July 2018). Manufacturing PMI soft data however remains stagnant at 50 in September reflecting fractional rise from 49.9 in August led by fall in output while new orders rose slightly along with deflationary pressures on prices. Business sentiment for September marginally increased to 51.5 from 51.4 in the previous month mainly due to slight rise in investment and cost sub-indices, others remaining largely unchanged from the previous month. Q3 has started on a muted note with soft and hard data both reflecting moderation in economic activity.
Growth is, expected to moderate as external demand slows; softening of exports and rising oil prices amidst growing trade tensions between the US and China pose downside risks on the economy. Domestic economy will continue to be resilient with private investment supporting growth and inflation remaining under control of the Bank of Thailand’s target. The large current account surplus (10.8% of GDP in 2017) is also seen to slightly ease at 8.0% of GDP in 2018 giving a breather to exchange rate devaluation and helping garner foreign reserves. Finally, the upcoming elections in February 2019 after over 4-years of military government rule is the key event to be watched for to further interpret the economic growth momentum. The Asian Development Bank (ADB) projects GDP growth at 4.0% and 4.1% in 2018 and 2019 respectively. Inflation is forecasted at 1.3% and 1.2% respectively for the same period.
MALAYSIA | Strong employment and investment drives growth
Malaysian economy decelerates with 4.5% y/y growth in Q2 2018 led by drop in exports while imports rebounded. Domestic demand remained strong owing to private consumption growth at 7.9% y/y and fixed investments recovering to 1.2%. Sentiments data suggest pick-up in economic activity with manufacturing PMI increasing to a 10-month high of 51.5 in September, for the first time since January 2018, driven by strongest rise in employment since July 2012. Consumer confidence rose to an all-time high of 132.9 in Q2 2018 from 91 in the previous quarter. Inflation eased to 0.2% y/y in August however the impact of consumption tax policy on headline inflation is expected to be transitory in nature and lapse towards the end of 2019. Core inflation fell 0.2% y/y the same pace as in July. Factory output rose 1.6% y/y in August, easing from 2.4% y/y in the previous month. The Central Bank’s monetary policy stance accommodativeness remains consistent and the MPC continues to monitor and assess the balance of risks around the outlook for domestic growth and inflation. In this respect, overnight policy rate remained unchanged at 3.25% in the latest meeting.
The external sector growth moderated in August with imports outpacing exports. Exports shrunk to 0.3% y/y while imports grew at a faster pace of 11.2% (v/s 10.3% in July) narrowing trade surplus to 1.6bn from 8.3bn previously. Economic growth should broaden as contributions from the external sector gain traction amidst downside risks to exports, while domestic demand is expected to be propelled by vibrant private consumption and higher investment spending. Nonetheless, the economy is susceptible to external shocks and downside risks of global trade tensions or regional geopolitical tensions.
PHILIPPINES | GDP growth outlook robust, investments the key driver
Philippines economic activity slowed in Q2 2018 with GDP growth at 5.9% y/y compared to 6.7% in the previous quarter. Imports grew faster than exports, rising by 19.7% y/y and 13.0% y/y respectively decelerating overall growth. Household and government expenditure eased to 5.6% y/y and 11.9% y/y respectively. Manufacturing PMI improved further to 52.0 in September signaling robust demand and upbeat business confidence. Industrial production growth moderated coming in at 9.3% y/y in August compared to 12.5% y/y in July. Inflation rose sharply by 6.7% y/y in September, hitting another 9-year high, after increasing by 6.4% y/y in the previous month. Core inflation fractionally eased to 4.7% y/y in September from 4.8% y/y in the month before. The Central Bank’s target of 2% inflation has been further exceeded while the policy rate was hiked 50bps in the latest meeting citing upside risks on inflation outlook and rising core inflation broadening price pressures amidst resilient demand conditions.
The Philippine economy continues to dominate the region as one of the fastest growing economies. The Government’s push for 10-point socioeconomic agenda for continuity in macroeconomic policies, infrastructure push, tax reforms and other structural reforms transformation are well taken at this stage to provide a thrust to further economic development. Current account deficit (CAD) at 0.8% of GDP in 2017 is seen to widen to 1.0% of GDP in 2018 as per ADB estimates. Also, growth is projected at 6.8% and 6.9% in 2018 and 2019 respectively while inflation is forecasted at 4.0% in 2018 and 3.9% in 2019. Major risks include regional slowdown and financial market instability amidst growing trade war like situation.
SINGAPORE | Economic growth remains on steady expansion path
Economic growth eased in Q2 2018 coming in at 4.0% y/y giving up 0.5pp from the previous quarter. Government and private spending decelerated in the quarter while exports stood steady against rising imports. Much of the slag resulted from sluggish domestic and external factors. According to production approach, manufacturing and services sectors slowdown at 8.6% y/y and 3.4% y/y respectively (v/s 9.7% y/y and 4.0% y/y) contributed to moderation in Q2 GDP growth while construction continued to contract for the seventh straight quarter (-4.4% y/y v/s -5.2%y/y). Soft data suggests manufacturing remaining muted with PMI contracting to 49.6 in September. Alongside, industrial production too moderated to 3.6% y/y in August (v/s 6.2% y/y in July). Headline inflation inched up to 0.8% y/y in September while core CPI marginally dipped to 1.8% y/y in the same period. The Monetary Authority of Singapore (MAS) sees upward pressure on core inflation underpinned by improving labor market rising gradually towards upper limit of 1-2% target range in 2018 while headline inflation is projected to be in the upper half of 0-1% forecast range for 2018. Trade surplus moderated to SGD 3.3bn in September compared to SGD 6.3bn in August led by rise in exports (6.2% y/y) against sharp increase in imports (9.5% y/y).
External sector being a significant driver of growth, global trade movements and conflicts led by the US against its key trading partners-China and European Union are posing threats to the economic development. Merchandise exports account for 120% of the country’s GDP and thus protectionism and tariff competition are creating upside risks to economic growth and activity.
Thus, from the current macroeconomic scenario of ASEAN and major economies of the region it is evident that for most nations external sector and exports have been on the downside, albeit being early signs in H1 2018. The growing US-China tariff war situation would have repercussion effects on this part of the world. For instance, ASEAN’s trade in iron and steel comprised 3.4% of its total trade in 2016, with exports amounting to US$20.3 billion vis-à-vis imports of US$56.9 billion. At US$3.3 billion, the US’ accounted for 1.5% of ASEAN’s total iron and steel trade in that year; the direct impact of the recent US tariffs on ASEAN is hence expected to be small. More of a concern is the overall impact given the possible repercussion effects, for both exports and imports, from major partners that may be affected by the tariffs. This is particularly true for China, which at US$24.1 billion accounted for 31.2% of ASEAN’s total iron and steel trade. The outturn on global trade is likely to impact emerging markets given China being one of the top trading partners of ASEAN. Largely, the risks surrounding the growth outlook of this region, is attributed to tariff competition and protectionism by the major powers of the globe.
Our estimates point towards slight slowdown in economic activity for most of these major economies in this region over the next couple of quarters in the unlikely event of further stiff competition in global trade negating strengthening domestic demand. Even though the countries are performing well on the domestic front laid on strong foundations, healthy private and public consumption and steady investments growth, overall future economic activity might take a setback, decelerating growth. Inflation too continues to be a concern of the monetary policy authorities and upside risks to headline and core inflation persists. Accommodative monetary policy stance with inflation targeting remains the focus of the Central Banks. On further global economic turmoil and geopolitical uncertainties the region is likely to face financial markets sell-off, exchange rate fluctuations and FII outflow from emerging markets on ripple effect of advanced economies cautious macroeconomic condition. In the ASEAN, government initiatives and fiscal policies would be ensuring sustainability in economic development. Amidst rising to balanced growth in developed countries contributing to expanding world economic growth, we see the ASEAN region growing steadily but with downside risks resulting in below par growth and upsides to inflation. The macroeconomic outlook remains stable and positive for the next two years supported by robust domestic growth with global uncertainties weighing down.
In our view, markets and corporates are watchful of development of incoming data. Manufacturing and investment remain upbeat in most economies and the region therefore continues to be positive on this front. Q2 2018 reflected a slowdown in growth for most nations led by decelerating external sector but it seen to be supported by domestic demand with broadly balanced short-term risks, although downside risks over medium term prevails. However, corrective measures are to be adopted only after further movement of data on growth and inflation is observed. The year is expected to end on a steady note and thus immediate reactions from corporates and investors are on a pause. The stability of manufacturing sentiments translating into growth momentum going forward continues to remain a concern and under increasing cost burdens and weakening currencies, manufacturers remain under pressure and further pickup in industrial activity would alter change in directions. Food manufacturing, basic metals, petroleum products and automotive industries are few sub-sectors under focus.
by Antara Mukherjee, Head of Research, Intueri Consulting LLP
Source : Financial chronicles print and e-version clippings on Intueri Consulting.
He worked with and spearheaded operations at two of the top ‘Big Four’ brands and now he is up to creating a ‘truly transnational consulting brand’ born out of Kolkata. Intueri Consulting LLP, the fledgling consulting firm floated by Ambarish Dasgupta, former India Head of management consultancy practices of PricewaterhouseCoopers and KPMG (in two different stints), promises to walk an extra mile with its clients and offer special attention on the basis of ‘deep research’. “That’s how we would like to position our brand- Intueri. A global consulting brand that stands for and also stands out on the basis of its deep research, very strong analytics, clear & unbiased point of view, strong articulation & representation.
The proposed brand positioning does not necessarily stem from an emotional stand point. There are other- more compelling economic reasons as well.
Dasgupta, who is also the Principal Advisor, IT minister, West Bengal government, said, “Given the global macro-economic situations, Kolkata or Bengal has its circumstantial attractiveness. There are geo-political and economic factors and advantages, which are drawing the investing community from outside the state and outside the country to this part of the world. After the withdrawal of TPP (trans-pacific partnership) by the US president Donald Trump, then the isolation views, the ASEAN countries needed to regroup and strengthen themselves. The China link road, RCP, OBOR- all became crucial. Given Bengal’s geographical location, strong socio-cultural proximity with many of the ASEAN countries and the fact that it has both road and sea routes, has become extremely important in the new scheme of things. One cannot ignore or overlook Kolkata or Bengal if one has to tap the ASEAN markets…the route would become roundabout otherwise.”
For the rest of the country also, Bengal has become extremely attractive because it is a GST-advantageous state with 95 million consumer base (it’s even higher if one considers the neighbouring north eastern states and at times even Bangladesh). Distribution is much easier and cheaper here, pointed out Dasgupta, adding, “Therefore we thought it to be the right time to create a global consulting brand out of Kolkata.”
The foundation of the brand-Intueri rests on the principles of PESTEL (political, economic, social, technological, environmental, legal analysis). Intueri would be offering both domestic and international companies country strategy based on PESTEL. With deep research and analysis being at its core, Intueri proposes to work closely with institutes and organizations like Harvard University, Brown University, Booth University, IIFT, Reuters, to name a few, said Dasgupta.
Its core areas would be offering broad based strategies on supply chain optimization, industry 4.0 (current trend of automation and data exchange in manufacturing technologies, which includes cyber-physical systems, the Internet of things (IoT), cloud computing and cognitive computing, bigger alliance, tackling board level issues, succession planning, he said.
The United States’ Federal Open Market Committee issued a statement on Wednesday, June 13, 2018, raising its benchmark rate by 25 bps and setting the target range for the federal funds rate to 1.75% to 2%, while maintaining an accommodative stance of monetary policy, in order to support strong labor market conditions and to achieve its long term objective of a 2% inflation rate.
The rate hike has been implemented in the backdrop of a sharp rise in the employment rate alongside a rising inflationary trend in the US economy. Consumer inflation (both the headline and the core) mayas well be expected to run well above the Fed’s target rate of 2%. The Federal Reserve has projected a median federal funds rate of 3.1% by the end of 2019, implying two rate hikes in 2018 and two more in 2019, upgrading both its growth and inflation projections amidst tightening labor market conditions. However, the actual path of the federal funds rate will depend on the incoming economic data.
Such rate hikes and/or hawkish messaging by the Federal Reserve affects not only the US economy, but also shapes the macroeconomic outlook and exerts a certain degree of influence on monetary policies in other emerging economies. For instance, this hike by the Fed seems to have influenced, at least partially, the repo rate hike by 25 basis points that was implemented by the Reserve Bank of India’s (RBI) Monetary Policy Committee, last month , effectively implying a reversal of the easy monetary policy regime that was being followed, in the Indian economy, for the past three years.
Usually, emerging economies such as India tend to have higher inflation and higher interest rates than those in developed countries such as the US and many of the (primarily Western) European nations. As a result, financial institutions, particularly foreign institutional investors (FIIs) would want to borrow money in the US at low interest rates in dollar terms and then invest that money in government bonds of emerging countries such as India, in local currency terms – to earn a higher rate of interest. When the US raises its domestic interest rates, the difference between interest rates of the two countries decreases, thus making India less attractive for the currency carry trade. As a result, some of the money may be expected to move out of the Indian markets and flow back to the US, therefore decreasing the value of India’s currency against the US dollar.In this light, it can be realized that had the RBI kept its rate unchanged while the Fed hiked them further, the spread between US borrowing costs and earned interests in India would have narrowed further. That could lead to greater capital outflows, and by extension– further weakening of the rupee.
As far as the Indian equity markets are concerned – consecutive increases in Fed Fund rates, as expected, have largely been priced in and absorbed well by Indian equities. In fact, the markets initially reacted positively as the increase in rates were in line with consensus estimates.
However, stocks in major emerging market economies have faced sell-offs due to the strengthening dollar and uncertainties perpetrated by the trade war between the US, China, European Union, and other major nations. In India, the debt and equity markets have witnessed outflows of over 40,000 crore rupees during the April-May period. Across the emerging economies, bond yields have risen due to growing dollar shortage in the global market and on prospects of higher interest rates in advanced economies. Having said that, India is better equipped to ride the impact of higher US interest rates due to its stronger economic growth and healthy foreign exchange reserves of more than $400 billion.
The adverse effect on INR although, will hurt India’s forex reserves and imports. India being one of the largest crude oil importers of the world, a weaker rupee vis-à-vis a dollarresults in more expensive imports of crude oil that may put cost-driven inflationary push across the whole economy and especially in those sectors that are highly sensitive to crude oil price movements. India generally runs a trade deficit, and such rate hikes by the Fed are more likely to widen the trade deficit.
India’s exports on the other hand, notably IT and IT-enabled services – will benefit to some extent from a stronger dollar w.r.t. the rupee. Companies with large import bills may suffer, however, the same benefit may not fully accrue to exporters due to strong competition in the export market.The only visible silver lining in this situation could be the recent decision by the OPEC countries to keep pumping and restoring crude supply to early 2017 levels, thereby reducing the cost of crude oil – that may partially offset India’s woes due to a weakening currency.
In sum, the Fed’s benchmark interest rate hike in line with expectations doesn’t impact the Indian equity markets directly, however FII capital outflows that result in weakening of the Indian Rupee vis-à-vis the dollar and a widening trade deficit at the backdrop of potential spikes in crude oil price, unless reigned in – may be worrisome for India in the mid to long term.