The Reserve Bank of India comes out with a quarterly review of its monetary policy and revises the reverse-repo and repo rates six per cent and seven per cent respectively. Experts tell us that Governor Y.V. Reddy has taken such a step for containing inflation between five and 5.5 per cent. Finance Minister P. Chidambaram agrees in nod and says what RBI has done is right for keeping the price rise in check. Great job done by both the RBI and the Finance Ministry?inflation will remain at the sub-six per cent level this year! Great news for the middle class!
So far as the common man is concerned, he is so poor that he does not bother about the RBI or the Wholesale Price Index. The poor fellow only knows that atta is selling at Rs 12 a kilo and how does he care about what statements are being given in Parliament or RBI'sheadquarters in Mumbai? It is only the middle class that remains concerned about the headline inflation. The sub-six per cent figure could be a number for this class, who is being hoodwinked into believing that all is being done to help the people so that they do not have to buy goods at high prices. Despite best of the efforts by the central bank to force banks to cut credit to the housing sector, the housing loans have kept the pace. This means people, requiring houses, continue to borrow even if the cost of borrowing has been jacked up between 200 and 250 basis points since end of 2004. They have done so because housing is a sheer necessity. After the policy review by the RBI on July 25, the home loans are again going to shoot up and the floating rates would soon touch 10 per cent. The banks would soon take a call on hiking their home loan rates since the Repo rate?at which they borrow from the central bank?has gone up. In their first reaction to the policy, most of the bankers have indicated that they are going to push the rate upward. Well, the middle class has to pay more of the equated monthly instalments (EMIs). The EMIs go from the overall household budgets, which would be further disturbed. So what inflation control are the RBI and the Finance Minister talking about?
It is like asking you: we will charge less for your groceries but you have to be ready for a bargain. Pay more on your EMIs. The issue is settled?simple! The industry chambers are the lobbying groups not only for their constituents but also for the government. Every time there is a government policy, these guys go and welcome it?sometimes without even reading the papers. Their job is done after the newspapers print their quotes hailing the government move. See what the Confederation of Indian Industry said about the credit policy review.
?The 25 basis-point increase in repo and reverse-repo rates each to seven per cent and six per cent respectively, is unlikely to affect the demand for a long-term credit, or the long-term fixed rates for corporate borrowing,? President CII, R. Seshasayee said. Someone must ask these industry leaders whom are they misleading? The higher interest rates would definitely affect the demand for credit since this demand was generated by lower interest regime?prevalent during the NDA rule. As was highlighted earlier, the party for the GDP growth also seems to be over even if the RBI has maintained the projections at 7.5 to eight per cent. The latest survey done by the National Council for Applied Economic Research has found the business confidence dipping by eight per cent. The cost of money and the slowing-down of the global economy are certainly factors that the government cannot wish away.
Besides, the impact of the Israel-Lebanon conflict on the Indian economy would be severe since it would not be for long that the government would be able to hold the price line for the petroleum products, given the crude price level touching 75 dollars a barrel.
Just when the mood in the UPA government was that the ?party will go on? and the GDP numbers will remain close to the double-digit figure, official data was released. It was loud and clear that the economy was going to land. The only question remained was whether it would be hard landing or soft landing.
The performance of six key infrastructure industries for May, 2006 was nowhere near their level last year even though the growth was shown at 5.1 per cent. These industries, comprising cement, steel, crude petroleum, petroleum refinery products, coal and electricity, had grown by 8.1 per cent in May, 2005. If we take the performance of April-May (first two months of the current financial year) together, the core sector growth dropped to 5.9 per cent from 7.1 per cent. On the face of it, the industries have a combined weightage of 26.7 per cent in the total Index of Industrial Production (IIP). But the rub-off is much greater since none of these areas stand alone. They impact the performance of not only the industrial sector but two other sectors?both services?contributing 54 per cent of the GDP and agriculture?a little over 20 per cent of the national production. Finance Minister P. Chidambaram who has been talking about 12 per cent growth in industrial production will do well to take a look at the growth rates in sectors like coal and electricity. Coal production, so essential for electricity generation, could not grow at all staying flat while the figure was 11.2 per cent in May last year. Even though the full impact of the slow coal mining would involve some lag, growth in electricity generation came crashing down to 4.7 per cent from 10.3 per cent. ?How can Finance Minister even think of 12 per cent industrial growth when most of the states have power cuts running for eight to 10 hours,? said a leading industrialist after meeting Mr Chidambaram. Cement, which had registered a rock solid performance, also caved in. The increase in production was limited to 6.3 per cent this summer against an impressive show of 15.3 per cent in last May. Steel looked back too and reversal seems to be all through. The stock market seems to have read the writing on the wall. It is coming under pressure from the punters who had earlier made a fast buck on selling the ?India growth story??. According to experts, it was the debt-funded demand that had been driving the eight per cent GDP growth for the last three years. The credit growth has been about 31 per cent against the 16 per cent rise in deposits. Thanks partly to the worries of the RBI and the interest rates increasing continuously for the past 12 to 18 months, the credit growth is going to reverse. Experts feel that the economy would reverse, maybe not by a steep rate but it is certain to retreat. That'sfor sure. The ?party goes on?? scenario is not going to hold and the government should make a strategy well in advance rather than taking a knee-jerk approach later. At least, RBI Governor Y.V. Reddy is one person who remains worried about the possible impact of the global cues, unabated rise in crude oil and the interest rates, on the Indian economy. The Bank of Japan, which had followed a zero-interest policy for many years, has reversed the policy while the US Federal Reserve has not stopped increasing the rates. RBI is expected to revise the bank rates again when it reviews its quarterly credit policy next week. The inflationary worries are for real worldwide. The Indian economy, which is integrated to the global economy to the extent of 500 billion dollars, cannot remain insulated. ?Those who think that India'sglobal integration is limited to exports and imports are quite wrong,? a recent study by the Assocham stated. It said the best way to tackle any global setback is to add to our internal strength. Well, that is a tall task for the UPA government, given its track record so far!
