Drought and skyrocketing pulses prices could dampen Diwali spirit
A drought year and the skyrocketing prices of pulses could play party pooper this Diwali.analysis Updated: Oct 23, 2015 23:29 IST
How do you spot an economic revival without poring over reams of statistics put out by the official number crunchers? It’s simple. Look around you: Are your neighbours dining out more often; is the class prima donna sporting the latest from the world of fashion; does your friend extol the virtues of the latest smartphone? Households buying more goods are early signals for a probable onset of an economic recovery. The clearest indications are available in any market or a mall.
India’s factory output growth accelerated to a nearly three-year high of 6.4% in August, amid signs that strong signs of revival in consumer spending and investment activity among firms. Output measured by the index of industrial production (IIP) grew at its fastest pace since October 2012, rekindling hopes of the broader economy’s revival.
It had grown at 4.1% in July 2015 and had barely crawled at 0.5% in August last year. Consumer durables output, an approximate guide of how companies are adding inventories of goods such as televisions and cars in anticipation of quicker sales, grew at a robust 17%, compared to a 15% fall in the same month of the previous year.
Capital goods output, which often serves as a proxy to gauge the pace at which companies are adding capacities, also grew at 21.8% in August, from a fall of 10.8% in August 2014. Last month the Reserve Bank of India cut its key lending rate — the repo rate — by 0.50 percentage points to 6.75%, setting the stage for cheaper loans for consumers ahead of the festival season and more affordable bank capital for companies to aid investment.
A lower repo has brought down banks’ borrowing costs, which, in turn, have prompted them to slash their “base rates”, the floor interest rate on which lending rates for final home, auto and corporate borrowers are fixed.
The repo rate cut is aimed at goading companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods, which mostly peak during the festival season during October-December.
A lower repo can lead to lower floating home loan rates, which move in tandem with base rates, and bring cheer to millions of home loan borrowers as they can expect their EMIs to come down. If this data was any indication, the chances are that people will be splurging more this festive season compared to the previous years.
The known unknown in this pack, however, are two variables: A drought year that have crimped farm income, and the skyrocketing prices of pulses. Both of these can potentially play party pooper this Diwali.