The beleagured consumer durable sector, stung by a tight monetary policy and poor off-take, could have something to cheer about in the coming quarters.
Analysts believe that government employees, would spend a portion of their lump sum arrears after the 6th pay commission recommendations are accepted in purchasing such goods.
RBI has raised benchmark interest rates several times to contain inflation by sucking out excess liquidity from the system. Inflation had peaked 6.69 per cent in early 2007 in India.
Hardening of interest rates, however, had an impact on industrial production. Industrial output growth in January registered a 10-month low of 5.3 per cent against 11.6 per cent in the same month last year largely because of an unexpected decline in capital goods and a continuing downtrend in consumer durables.
Reserve Bank of India (RBI) governor YV Reddy has said economic managers face an “acute policy dilemma” due to rising food and energy prices and said containing inflation was a high priority.
Chief economist of Reliance Industries Limited (RIL) TK Bhaumik said that the arrears would certainly give a boost to the consumer goods sector.
“A portion of the arrears would go for savings, but some portion would be used to purchase goods. Depending on when it is implemented, the manufacturing and consumer goods sector can look forward to stronger growth,” Bhaumik said.
Some economists felt the pay out would strain government finances and widen deficit.
DK Joshi, Principal Economist, of credit rating agency Crisil said the major impact of this pay increase is about 0.5 per cent of GDP implying that fiscal deficit would cross the three per cent of GDP mark. The government has set a fiscal deficit target of 2.5 per cent for 2008-09. More money into the system could also result in higher inflation. Macro-economic managers are grappling with policy dilemmas as they struggle to contain prices and maintain high growth in national income.
While India’s wholesale price index (WPI)-based inflation rose to a 10-month high to 5.92 per cent for the week-ended March 8.