On Air Now

Upcoming Shows

Program Schedule »

Listen

Listen Live Now » 1450 AM Holland, MI

Weather

Current Conditions(Holland,MI 49422)

More Weather »
77° Feels Like: 79°
Wind: WSW 0 mph Past 24 hrs - Precip: 0”
Current Radar for Zip

Today

Partly Cloudy 77°

Tonight

Partly Cloudy 64°

Tomorrow

Scattered Thunderstorms 78°

Alerts

Analysis: Smarting firms push case for India policy breather

By Abhijit Neogy and Henry Foy

NEW DELHI/MUMBAI (Reuters) - A. Chandra Shekhar, the CEO of a small alternative energy solutions firm at the heart of India's much-vaunted boom story, should be rolling in orders and expanding his business on the coat-tails of near double-digit economic growth.

But his funding and growth prospects for the immediate future have dried up, thanks to the anti-inflationary crusade of one of the most aggressive central banks in the world.

"The scenario is that industries require my technology and services, but I do not have the funds to start the projects," said Shekhar, who predicts Solar India Solutions will do well to break even this fiscal year with no chance of order-book growth.

"While we are trying to raise money, it has become too costly to even think about it. It is impossible for me to approach a big company without financial backing."

Reeling from 11 interest rate rises since March 2010, Shekhar is one of a chorus of industrialists and corporates suffering from the central bank's single-minded strategy, which is increasingly presenting policymakers with a dilemma.

With the government effectively paralyzed by corruption scandals and protests, the Reserve Bank of India (RBI) has been left to fight the inflationary battle without fiscal policy support, and equipped with limited tools. It seems determined to persist with its crusade against inflation for now.

"At the moment the biggest priority for India is inflation. Of that, there is very little doubt in my mind," said Bimal Jalan, a former governor of the RBI.

India's growth rate is slowing - car sales in July contracted for the first time in nearly three years - and consumer goods demand in June slowed substantially from a year earlier. Manufacturing output also slowed substantially in the April to June period.

Businessmen like Shekhar are not alone. Many small businesses in India have abandoned expansion plans or closed down units due to a dearth of affordable finance, says Chandrakant Salunkhe, president of the Small and Medium Business Development Chamber of India.

In the debt-intensive real estate industry, major players have sold off land parcels to meet soaring repayments, and there are signs of a squeeze in sectors from autos to mining to fast-moving consumer goods - all at the heart of the India growth story.

"There is a likelihood of closing down many SMEs for want of funds ... It is therefore indispensable that the RBI should not only bring down interest rates but also introduce new lending schemes for the sector at lower interest rates," said Salunkhe.

That would be doable if inflation was falling quickly. But headline inflation remains above 9 percent, much above the RBI's comfort level of 4 to 4.5 percent, forcing the central bank to continue its hawkish monetary policy stance.

"A formal lowering of its GDP growth forecast of 8 percent may not happen until ... October, but it will probably signal downside risk to its growth forecast," leading brokerage house CLSA said in a note.

"But RBI will maintain its hawkish stance," the note added.

THE US IMPACT

India's stubborn inflation is due to supply bottlenecks, food prices and high oil prices, and now it faces worries that a possible new round of quantitative easing by the U.S. Federal Reserve could see a flood of capital into emerging markets.

"Obviously, Ben Bernanke's upcoming speech in Jackson Hole, Wyoming, will be the joker in the pack," said a note by leading brokerage house CLSA. "Any hint of further strong quantitative easing by Bernanke could favorably affect risk appetite and commodity prices, and hence will be bad for India's inflation and interest rate outlook."

With New Delhi only recently showing fiscal discipline with a long delayed 9 percent increase in diesel prices in June, and capacity bottlenecks slow to clear as big projects and reforms stall, fighting inflation has been left to the central bank.

Despite the series of policy rate increases, real interest rates in India are still in negative territory with the repo rate (the RBI's main lending rate) still lower than the headline inflation rate by about 120 basis points.

Even at an 8 percent pace, India will be the second-fastest economy in Asia, but it needs to grow quickly in order to raise living standards and create jobs for a surging working-age population.

There is no sign at all of a possible plunge in growth to a "hard landing," which is technically difficult to define but conceptually would mean India couldn't generate the number of new jobs needed for its young population or the revenue gains the government requires to contain its fiscal deficit.

QUARTERLY REVIEW

The anti-inflationary consensus is expected to broadly shape the contours of the September 16 mid-quarterly review of monetary policy, at which the central bank is expected to raise rates by 25 basis points and continue its hawkish tone.

Despite a sign of slowing growth, the government appears on board with the RBI - for now.

"I think we understand and fully support RBI's stance on inflation, that is the priority," a senior finance ministry official told Reuters, indicating that the battle against inflation has been left with the central bank.

But there is not such consensus among analysts. And even the central bank's policy advisory team had leaned in favor of a pause on July 26, when the RBI surprisingly raised them by half a percentage point.

"The sequential and year-on-year reduction in inflation numbers ... may help in soothing some concerns that the rate hiking cycle will continue," said Goldman Sachs in a report after India's inflation numbers were released on Tuesday.

Citigroup say that inflation has peaked, but "persistently high inflation and RBI's hawkish tone raises the risk of a last 25 bp hike in September"

The government, reeling under allegations of graft and criticism for failure to tackle rising prices, cannot afford to let growth dip and affect its long-touted approach to pulling millions out of poverty every year.

Car sales in India fell almost 16 percent in July, the first drop in two and a half years. Production of consumer goods grew less than 2 percent in June, reinforcing fears that consumer demand is on the wane in the country.

Growth in the January to March quarter was the slowest in 5 quarters and, barring the capital goods segment, industrial output numbers were on the slower side in June.

Market participants might believe growth risks from the global economy could see the central bank loosen policy, at least going by pricing in interest rate swaps. The one-year rate is currently at 7.80 percent, below the central bank's main lending rate of 8 percent.

Yet, much depends on how the situation in the United States and the eurozone plays out.

Another senior official in the finance ministry said that if there is a meltdown in the United States and the eurozone, that may seriously cloud India's prospects and the central bank may then have to turn its policy around to preserving growth.

That could come sooner than later. Private economists have increasingly pared growth forecasts for the fiscal year ending in March 2012 to below 8 percent, while policymakers have also scaled down projections to between 8 and 8.5 percent.

Even then, the RBI will most likely pause for some time before it actually cuts rates to prop up growth.

"We maintain our stance of a pause in interest rate hikes by the Reserve Bank of India in FY 12 and 100 bp rate cuts in FY 13," said Goldman Sachs.

(Additional reporting by Subhadip Sircar in Mumbai; Editing by Alistair Scrutton, Vidya Ranganathan and John Chalmers)

Comments