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India's merchandise exports in May rose by 20.55 per cent to USD 38.94 billion, while the trade deficit ballooned to a record USD 24.29 billion, according to the government data released on Wednesday.

Imports during May 2022 grew by 62.83 per cent to USD 63.22 billion, the data showed.

The trade deficit stood at USD 6.53 billion in the same month last year.

Cumulative exports in April-May 2022-23 rose by about 25 per cent to USD 78.72 billion.

Imports in April-May 2022-23 increased 45.42 per cent to USD 123.41 billion.

The trade deficit during the first two months of this fiscal widened to USD 44.69 billion against USD 21.82 billion in the year-ago period.

Petroleum and crude oil imports during May 2022 surged 102.72 per cent to USD 19.2 billion.

Coal, coke and briquettes imports jumped to USD 5.5 billion against USD 2 billion in May 2021.

Gold imports increased to USD 6 billion during the month under review from USD 677 million in May 2021.

Engineering goods exports in May increased by 12.65 per cent to USD 9.7 billion, while petroleum products exports grew by 60.87 per cent to USD 8.54 billion.

Gems and jewellery exports stood at USD 3.22 billion in May compared to USD 2.96 billion in the same month last year.

Exports of chemicals rose 17.35 per cent to USD 2.5 billion in May.

Similarly, shipments of pharma and ready-made garments of all textiles grew by 10.28 per cent and 27.85 per cent to USD 2 billion and USD 1.41 billion, respectively.

Export sectors that recorded negative growth in May include iron ore, cashew, handicrafts, plastics, carpet and spices.

The commerce ministry said the estimated value of services import for May is USD 14.43 billion, exhibiting a positive growth of 45.01 per cent compared to USD 9.95 billion in the same month last year.

"The estimated value of services imports for April-May 2022 is USD 28.48 billion exhibiting a positive growth of 45.52 per cent vis-a-vis April-May 2021 (USD 19.57 billion)," it added.

Also Read:- Oil prices fall as expected U.S. interest rate hike looms

Oil prices fell on Wednesday on concerns about fuel demand and global economic growth before an expected big hike in interest rates by the U.S. Federal Reserve.

Brent crude futures for August were down $1.27, or 1%, at $119.90 a barrel as of 1001 GMT, in volatile trading.

U.S. West Texas Intermediate crude for July fell $1.44, or 1.2%, to $117.49 a barrel.

"Oil markets are seeing uncertainty over what central banks do next and how that impacts oil demand," said UBS analyst Giovanni Staunovo.

Surging inflation has led investors and oil traders to brace for a big move by the Fed this week – a 75-basis-point increase, which would be the largest U.S. interest rate hike in 28 years.

And when you turn towards international markets, you have the options of investing in developed markets, emerging markets, and frontier markets.

For instance, developed nations usually have more advanced economies, better-developed infrastructure, and higher per capita income.

However, a high per capita GDP alone does not confer developed economy status without other non-economic factors such as the infant mortality rate and life expectancy.

Former Reserve Bank of India (RBI) deputy governor Viral Acharya has called on central bankers to not compromise while performing their duties and raise issues with the government even if it comes at the cost of losing their job.

"Sometimes, the tendency of technocrats in central banks is to think, 'Oh, I have to do my regular day job, I have to do a part of my legal mandate well. So, let me just not confront these issues in my day-to-day dealings with the government. Let me just strike compromises or turn a blind eye,'" Acharya said during a webinar hosted by the International Monetary Fund (IMF) on June 14 on the regulation, supervision, and handling of distress in public sector banks (PSBs).

"Of course, there are many technocrats who don't necessarily follow this approach. But I think that a string of technocrats each doing their job in a narrow space and making these compromises, actually leave their countries with a fairly bad outcome stitched together over periods of time."

"I see compromises by central bankers in India over long stretches of time as having given fairly compromised and terrible banking sector outcomes over the last five decades. Of course, if you raise a voice, if you push for advocacy or reform of public sector banks, if you push openly for legal reforms, that is going to be difficult. It can lead sometimes to (chuckles) you not having the right relationships with the finance ministry. In extreme cases it can lead to a loss of job. But my sense is technocrats should embrace these risks," Acharya said.

Acharya took charge as a deputy governor of the RBI in January 2017. However, he resigned in July 2019, around six months before the end of his three-year term, citing "unavoidable personal circumstances".

Acharya, who is the CV Starr Professor of Economics at New York University's Stern School of Business, enjoyed a fraught relationship with the government during his time at the RBI. In an October 2018 speech (external link), Acharya said governments that "do not respect central bank independence will sooner or later incur the wrath of financial markets". The speech, which came amid a tussle between the government and the RBI over the latter's reserves, created a furore.

Acharya’s resignation from the RBI was preceded by similar high-level exits.

Raghuram Rajan, who served a three-year term as the governor starting September 2013, faced repeated political attacks for his speeches regarding tolerance and central bank independence. In a letter to RBI staff in June 2016, Rajan wrote he would be returning to academia after his term ended.

Meanwhile, Urjit Patel — Rajan's successor as governor — resigned on December 10, 2018, two years and three months into the job. Patel, who cited "personal reasons" in a statement announcing his resignation, also had a turbulent relationship with the government.

In his book 'Overdraft', released in July 2020, Patel wrote that India's fledgling bankruptcy law was deliberately weakened in mid-2018 after the RBI released its famous February 12, 2018 circular that spelt out an amended framework for the resolution of banks' stressed assets. According to Patel, he and the then finance minister, the late Arun Jaitley, were "until then, for the most part...on the same page". However, the aforementioned circular led to a "legal onslaught" on the RBI, Patel wrote.

Patel was succeeded by Shaktikanta Das on December 12, 2018. Das, a former economic affairs secretary, has been widely credited with repairing the relationship between North Block and Mint Street.

Cost of PSU banks

In his comments at the IMF webinar on June 14, Acharya said the Indian banking sector and the taxpayer were suffering from government ownership of banks.

"…certain rules and regulations of the banking sector have to be uniform. For example, you can't have an accounting standard for banks which is different between public sector banks and private banks. Why has India not adopted the IFRS (International Financial Reporting Standards) accounting system? Why has India not adopted expected credit loss provisioning? Why has India not adopted accelerated provisioning standards, which don't backload provisions after defaults and NPAs (non-performing assets) have been recognised?"

Acharya said the source of these problems was the government's refusal to loosen its purse strings further to infuse more capital into PSBs. The non-implementation of these standards and PSBs' ability to "get away with certain kinds of extraordinarily delayed provisioning standards", according to Acharya, was resulting in a “race to the bottom for the entire banking sector”.

Calling the presence of PSBs in India a “historic accident”, Acharya said data and economic forces at play in India’s financial sector showed they were causing a huge loss to the taxpayer.

"Taxpayers in India are running a huge negative account because of the presence of public sector banks. And I think any gains that can be brought to the table, such as creation of bank accounts for financial inclusion…I am never able to attribute that success squarely at the doorstep of public sector banks," the former central banker said.

Fitch Ratings on Tuesday said the Reserve Bank is likely to raise interest rates further to 5.9 per cent by December 2022, on deteriorating inflation outlook.

In its update to Global Economic Outlook, Fitch said India's economy faces a worsening external environment, elevated commodity prices, and tighter global monetary policy.

"Given the deteriorating outlook for inflation, we now expect the RBI to lift rates further to 5.9 per cent by December 2022 and to 6.15 per cent by the end of 2023 (vs. previous forecast of 5 per cent) and to be unchanged in 2024," Fitch said.

Last month in an unscheduled policy announcement, the Reserve Bank of India (RBI) raised rates by 40 basis points to 4.4 per cent, and subsequently to 4.9 per cent last week.

The RBI has forecast inflation to be 6.7 per cent by the end of current fiscal. The retail inflation for May came in at 7.04 per cent.

"Inflation has risen to an eight-year high and broadens across more CPI categories, posing a severe challenge to consumers. In the past three months, food inflation has increased by an average of 7.3 per cent year-on-year, while healthcare bills are rising at a similar pace," Fitch said.

According to Fitch, the April-June quarter growth is likely to improve on a rebound in consumption as COVID-19 cases subsided towards end-March.

"GDP grew by 4.1 per cent year-on-year in 1Q22 (January-March) compared to our March forecast of 4.8 per cent. We now expect the economy to grow by 7.8 per cent this year (2022-2023), revised down from our previous forecast of 8.5 per cent," Fitch said.

Fitch had last week upped outlook on India's sovereign rating to 'stable' from 'negative' after two years citing diminishing downside risks to medium-term growth on rapid economic recovery. The rating was kept unchanged at 'BBB-'.

The Outlook revision reflects our view that downside risks to medium-term growth have diminished due to India's rapid economic recovery and easing financial sector weaknesses, despite near-term headwinds from the global commodity price shock," it said.

The Indian economy grew 8.7 per cent in the last fiscal and RBI expects growth to be 7.2 per cent this fiscal.

Amid opposition from rich nations, India has called for inclusion of ‘therapeutics and diagnostics’ — testing and treatment of a disease — as part of the temporary patent waiver agreement that can pave the way for the future need to tackle any crisis.

Twenty months ago, India and South Africa had urged the World Trade Organisation (WTO) member nations to agree to temporarily waive some sections of Trade-Related Aspects of Intellectual Property Rights (TRIPS) to ramp up production of vaccines, therapeutics, and diagnostics to combat the Covid-19 pandemic. The draft agreement, however, falls short of the original proposal and includes only vaccines.

At the 12th ministerial conference at Geneva, Commerce and Industry Minister Piyush Goyal said there was a need to redouble efforts and commence negotiations on therapeutics and diagnostics, since the pandemic was far from over, particularly for the developing and least-developed countries. Besides, it is too late in the day if only vaccines are included as the pandemic has run its initial course, he said.

“While vaccines were for preventive need, we need to ramp up manufacture of therapeutics and diagnostics to achieve a comprehensive test and treat strategy or workable waiver or let’s say an enhanced, compulsory licensing, as we say, can deliver in some measure what it was set out to achieve. Vaccines are no longer in scarcity and affordable stocks available across the world,” Goyal said at the thematic session on ‘Response to Pandemic’.

ALSO READ: WTO MC12: Piyush Goyal backs people-first approach to world trade

“In the course of my discussions, it has been indicated that many countries do not favour supporting what has been asked. Well, if it’s only vaccines that we are looking at providing, I think it's too late in the day for that,” the minister said, adding that it was unfortunate that the profits of the pharmaceutical behemoths prevail over global growth.

India and South Africa and 63 co-sponsors had initially made the TRIPS waiver proposal to help middle- and low-income nations get access to Covid-19 vaccines and drugs. However, the discussions reached a deadlock in the TRIPS Council — a body responsible for monitoring the operation of TRIPS agreement.

The minister said the draft text from these discussions did not reflect what India as a co-sponsor of the waiver proposal had envisaged. The commencement of text-based negotiations allowed the larger membership to engage in discussions on the texts. “I was really hopeful that the remaining concerns with this text would have been resolved and reconciled. For India, a consensus-based outcome is of paramount importance,” he said.

Goyal also said India had made several compromises to enable submission of a ‘clean’ document on the “Response to Pandemic” at the ministerial.

The compromises include the TRIPS automaticity clause, which was not accepted, extensive dilution of the language on intellectual property, and tech transfer, among others. “I hope that the flexibility that we have shown will pave the way for its acceptance and be replicated in other tracks for a successful MC-12,” he said.

Outcome on WTO’s response to the pandemic, which includes the TRIPS Waiver proposal, is one of the priority items for MC12.

Demonetisation in November 2016 was a challenge for many businesses, especially the small and medium enterprises (SMEs). It was, however, a boon for banks that saw a large growth in their deposits. Cash stashed away by households found its way into bank accounts. From 2015 onwards, industrial credit slowed down very sharply to hit a several decades low of around 5 percent in 2017, and after a blip up in 2018, continued slowing down.

This trend of deposit growth being higher than credit growth goes back to the financial year 2015. Deposits growth remained at double digit throughout this period. With deposit growth at double digit, and credit growth between 5 and 7 percent, banks were floating on easy liquidity.

As the COVID-19 pandemic hit in 2020, the Reserve Bank of India (RBI) unleashed additional liquidity and policy rate cuts that saw them hit all-time lows. For bank managers, the real challenge in the last five years was finding credit growth, and managing the impact of the pandemic on credit quality and on the organisation. For almost eight years, growing deposits was not a challenge.

This easy period of deposits for banks is coming to an end, and in the next couple of quarters we are likely to see the beginning of an intense competition for deposits. The RBI is on a clear and aggressive path of rate hikes and liquidity squeezing. The May and June policy rate hikes by the RBI’s MPC will be followed by similar hikes in August and September. Higher rates will ultimately be transmitted by banks on both sides of the balance sheet — in the pricing of loans, and deposits.

In the past, increasing policy rates were beneficial for banks as the transmission was asymmetric — quicker and larger for loans than that for deposits. In this cycle, it is likely to be different, and we may see sharper pricing up for deposits than loans. This relatively larger and quicker rate transmission on the deposit side will be driven by four factors.

First, credit growth will remain strong. While consumer credit will slow down due to higher interest rates, the demand for working capital from business will remain strong. Rising commodity prices are driving working capital demand as the cost of inventory has gone up. There are some early signs of capex revival which may further drive credit demand. After nearly five years, we are seeing credit growth in double digits. The policy of withdrawal of liquidity along with high credit growth will mean that the demand for deposits will increase.

Second, households are facing serious inflation that will dent savings. In addition to cost-of-living increases, households will see increase in the costs of borrowing. Over the last seven years as the industrial credit growth stagnated, banks and non-banking finance companies (NBFCs) have lent freely to households, and these consumer loans now form a larger share of the banks’ loan book than industrial credit. This expansion of consumer credit has been primarily in the top two income deciles of households which also are the biggest contributors to household savings.

From 2019, regulations have mandated the interest rate on all the consumer loans to be linked to external benchmark such as the repo rate or T-bill yields. These loans will, therefore, be priced sharply upwards. In case of longer maturity loans such as home loans, lenders will try to keep the monthly payments constant by extending the maturity of the loans. However other loans that constitute nearly 50 percent of consumer borrowing, such as personal (unsecured loans), vehicle loans, etc. will all see increase monthly repayments. The net effect of these rate hikes will be that households that contribute most to the banking deposit base will see their net savings (savings after loan repayments) shrink significantly.

Third, as the rate cycle peaks around October/November, debt mutual funds will become a very attractive alternative to investors. The yields on five-year AA corporate bonds have already started inching closer to 10 percent, and with the forthcoming policy rate hikes these yields will further go up. High-quality corporate bonds funds comprising AAA and AA rated papers, could start delivering double-digit yields as the rate cycle peaks. This would entice high network individuals (HNIs) and institutional depositors to move their money from deposits to these funds. Bear in mind that funds, held over three years, provide a sizeable tax advantage over deposits.

Finally, the COVID-19 pandemic has seen a very rapid increase in the adaption of digital tools — mobile apps especially – to conduct banking transactions. Thanks to these tools, opening new accounts and moving money between them is way easier now than was the case even three years ago. These tools, thus, make deposits much more fungible than before. It is much easier to woe a depositor by offering a higher rate than was the case just a few years ago. Digital technologies have also made it much easier now to move money from deposits to mutual funds.

The net effect of these factors is that the deposit market is now much more contestable. It is also important to note that over the last five years, several new players – the small finance banks and payment banks – have entered as competitors for deposits. Even the handful of deposit-taking NBFCs that have not focused much on raising retail deposits in an era where wholesale funding from banks and bond markets was very aplenty and cheap, would become active and aggressive in raising deposits.

Intensifying competition for deposits will mean that the cost of deposits will go up, and it will dent margins, unless the cost hike is passed on to the borrowers. Given the nascence of credit growth, it seems unlikely that there will be full pass through of deposit rate increases to loans. Bank margins will come down.

After a long time, bankers will realise that theirs in a unique business that must compete on both sides of the balance sheet. They will have to get ready to face something they haven’t for a very long time: intense competition for deposits.

India's Gross Domestic Product (GDP) grew at the same annual average rate during the terms of the United Progressive Alliance and National Democratic Alliance governments, at least until the coronavirus pandemic struck.

According to new data released by the Ministry of Statistics and Programme Implementation, India's GDP grew at an annual average rate of 6.8 percent from 2004-05 to 2013-14—the 10 years Manmohan Singh was the prime minister (PM).

In the first six years of Narendra Modi's tenure as PM—before the pandemic struck and pushed India into a recession—India's GDP again grew by 6.8 percent on an average from 2014-15 to 2019-20.

If the two pandemic-hit years of 2020-21 and 2021-22 are taken into account, the average GDP growth rate under Modi drops to 5.4 percent.

The recently-released annual GDP growth data stretches back to 1951-52. Until now, comparable growth rates for the current GDP series with 2011-12 as the base year was available only till 2005-06.

The current GDP series, introduced by the statistics ministry in early 2015, attracted heavy criticism as it showed a big jump in growth even as high-frequency indicators painted a grimmer picture. For instance, the new series raised the GDP growth rate for 2013-14 to 6.9 percent from 4.7 percent under the previous series.

This number has subsequently been revised down to 6.4 percent.

The statistics ministry attributed the revision to a shift in focus to measuring value-addition based on a wider dataset of corporate earnings from volume-based growth in manufacturing.

However, comparison across years was difficult as the new series only provided growth rates starting from 2012-13. This led to calls for a 'back series'.

Back series controversy

In July 2018, the Sudipto Mundle-led committee on real sector statistics, set up by the National Statistical Commission, said India clocked a growth of 10.8 percent in 2010-11 as per the new GDP series. This was higher than the 8.9 percent estimated under the old series.

Further, the committee's estimates showed GDP growth averaged 8.0 percent per year during the 10 years of the Singh government as per the new series, while growth in Modi's first four years as PM averaged 7.3 percent per year.

These numbers spilt over into the political arena, with the Congress saying the data proved "like-for-like, the economy under both UPA terms outperformed the Modi govt (sic)".

However, a month later in August 2018, the statistics ministry said the GDP back series given by the committee on real sector statistics was not official but only "experimental results".

The official GDP back series, released in November 2018, showed GDP grew 7.4 percent per year on average from FY15 to FY18. Meanwhile, the annual average GDP growth rate for the last nine years of Singh's tenure as PM was revised to 6.7 percent, leading to another outcry and accusations of political interference in the calculation of India's official statistics, especially with the 2019 general elections just around the corner.

Full comparability

The numbers now released (external link) by the statistics ministry allow comparisons to be made across several decades. Some of the striking highlights are as follows:

The 6.6 percent contraction in the GDP in 2020-21 is the largest ever since 1951-52. The next worst year was 1979-80, when the GDP contracted by 5.2 percent.

>> Since 1951-52, India's GDP has contracted on six occasions: by 6.6 percent in 2020-21, 5.2 percent in 1979-80, 2.6 percent in 1965-66, 0.6 percent in 1972-73, 0.4 percent in 1957-58 and 0.1 percent in 1966-67.

>> The 2021-22 GDP growth rate of 8.7 percent is India's fourth-highest since 1951-52. The highest rate of growth of 9.6 percent was recorded in 1988-89. As such, India has never hit double-digit growth when it comes to real GDP.