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Balm The Blisters PDF Print
Saturday, 16 June 2007 05:30
Clearly, reality bites. Explains Laveesh Bhandari, founder and director, Indicus Analytics: "Everything is short-term if supplementary actions are not taken. In the short term, inflation needs to be handled and, in the medium term, infrastructure." Others echo that unless India can remove the infrastructure bottlenecks in areas like power, and solve the issue of skills shortages over the next few years, the current high-growth era will end up as a blip on the economy's radar. Manufacturing grew by 15.1% in April; overall industrial production rose by 13.6%, FM feels it is time to shed any scepticism about the sustainability of high growth, Inflation is a concern; the feeling it has been tamed is based on five myths, Higher interest rates can scuttle growth if it stymies demand in crucial sectors, Demand is way ahead of supply; capacity hikes are still unable to keep pace. In its editorial last week, The Economist said it "remained unconvinced" that the Indian economy wasn't overheated. The current high growth can sustain only if infrastructure bottlenecks are removed, shortage of skills is curbed. Other experts were "pleasantly surprised" that despite the several seemingly negative signals, the Indian economic elephant continues to run as fast as it has in the past three years. In fact, most people were shocked at the over 15 per cent growth in the manufacturing sector in April. this year; it was among the highest ever witnessed in post-Independence history. Look, the critics said, the high growth is a sure-shot sign of overheating. Coupled with the prospects of high inflation, higher interest rates and increasing bank credit (which pumps more money into the system), it points to a deceleration at best, and a slowdown in a worst-case scenario. Says D.H. Pai Panandikar, economist and advisor, RPG group: "The April growth was significantly higher than what the trends would have predicted, but it can't increase much further." So, why are economists so worried about India's high growth rates? The biggest concern remains inflation despite a fall in the wholesale price index from much over 6 per cent to just over 5 per cent. But it can go up again. The Economist feels the idea that "inflation has been tamed" is based on five myths. One, price rise is caused by sharp increase in food items. Reality 1: manufactured goods have contributed much more to the rise in inflation. Two, measures like export ban on wheat have worked. Reality 2: while they have reduced WPI, retail prices have risen by almost 8 per cent. "A third myth is that the increase in fixed capital spending...will immediately lift the economy's speed limit," says The Economist. Reality 3: in the short run, it will aid overheating. Four, high interest rates will automatically slow down the economy. Reality 4: real interest rates in India are still among the lowest in the world. Finally, that tightening will create supply constraints. Reality 5: if inflation goes out of hand, India's growth story will end quite prematurely. Clearly, reality bites. Explains Lovesh Bhandari, founder and director, Indicus Analytics: "Everything is short-term if supplementary actions are not taken. In the short term, inflation needs to be handled and, in the medium term, infrastructure." Others echo that unless India can remove the infrastructure bottlenecks in areas like power, and solve the issue of skills shortages over the next few years, the current high-growth era will end up as a blip on the economy's radar. It can happen in the short run to any demand-led growth like India's. A major reason for this dream story is that demand is accelerating ahead of supply and, only now, various sectors have added new capacities. This has expectedly pushed up asset prices, as with real estate. Agrees Kunal Kakad, national director, Colliers International India: "We have witnessed an average increase of 100-200 per cent in property prices in most pockets in the past few years." According to Jai Mavani, executive director, KPMG, "developers who were holding on to their valuations are open to doing deals with private equity funds at valuations that are more comfortable to the former as opposed to what they would have got three months ago." To curb a runaway rise, the RBI hiked interest rates which, in turn, was expected to eliminate speculation and force some buyers to postpone their decisions. This has happened and Ramesh Jogani, CEO, Indiareit Fund, admits that "the property market has already corrected by 15-20 per cent in all the cities". While India Inc agrees that high interest rate will reduce speculation and check price rise, it thinks that it will also hurt demand and, hence, growth. Two indicators are enough to show that this is indeed happening. At a press conference last week, ICICI Bank's CMD K.V. Kamath said the future growth in the bank's retail credit will be 20-25 per cent, or less than the 35 per cent clocked earlier. Similarly, retail investors shied away from the much-hyped DLF initial public offering due to apprehensions about property prices. The retail portion of the IPO wasn't even fully subscribed. As Amit Mitra, secretary general, FICCI, explains, "With credit becoming costlier, the high demand, high growth scenario in consumer durables will slow down." Adds Rahul Bajaj, chairman, Bajaj Auto, "The two-wheeler sector has not been doing well. The main reason could be high interest rates and the liquidity crunch." Rajeev Chandrashekhar of BPL group notes that interest rates are hardening "everywhere, including the US and Europe. In fact, Japan, which had a zero interest rate regime, has also hiked rates". Still, there is optimism that the current growth phase is sustainable. Chandrashekhar believes this is an investment and consumption-led growth. "Investments are not slowing down; there are no signs of consumption slowing down either," he explains. Mitra is even more gung-ho and says that the growth rate in the index of industrial production, which rose by 13.6 per cent in April, can even go up to 15 per cent "provided certain issues (like infrastructure and interest rates) are sorted out." Mitra cites three factors for his confidence in the Indian economy. Higher imports of capital goods, or plant and machinery, has increased productivity. "Thus, there is an embodied energy for growth," he says. Global acquisitions by several Indian firms too are adding to growth. Finally, the demand pull in several sectors like consumer goods is pushing the industry "to the limits of capacity utilisation." In conclusion, it's time for you to take your pick. Most of you are likely to be on the positive side, and contend that India's growth is sustainable for another 5-10 years. Recently, Kamath said that if China can witness a double-digit growth for 10 years continuously, so can India. Union finance minister P. Chidambaram confidently espoused that it is now time to shed any scepticism about the sustainability of India's strong growth. But some of you are likely to disagree. For you know that the Indian economy has invariably been like a pack of cards. A slight jolt and it buckles under. More importantly, India's decision-makers are allergic to accepting hard choices at the right time. If Chidambaram & Co refrain from taking corrective steps, the economy may get into a downward spin. As The Economist puts it, we will see what happens when the 'neither too hot nor too cold' goldilocks tests the 'hot-n-spicy' vindaloo. Source: http://www.outlookindia.com/full.asp?fodname=20070625&fname=DLF+%28F%29&sid=1&pn=1
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