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All is not well with the Indian economy

Households putting off spending are early warning signals for the onset of an economy-wide squeeze. Spending on television, refrigerators and cars since autumn continues to remain muted. HT reports.

business Updated: Nov 02, 2013 15:35 IST
HT Correspondent

Households putting off spending are early warning signals for the onset of an economy-wide squeeze. The clearest indications are available in any market or mall.

Falling consumer durables’ output mirror what most shop-end evidence was throwing up. Spend on television, refrigerators and cars since autumn continue to remain muted, squeezed by high prices and low income growth.

The fact that car sales continue to fall show how high inflation and interest rates are denting discretionary spending.

Elevated prices — retail inflation was 9.84% in September — have hurt family budgets hard, especially at a time when thousands of factories and firms in India, squeezed by costly input and borrowing costs, have offered meagre salary hikes and are holding back expansion and hiring.

Read: Little calm, but growth to remain in low gear

India’s economic growth crashed to a four-year-low of 4.4% during April-June this year from 4.8% in the previous quarter, proving fears of a widespread slowdown as factories are producing less, companies are offering fewer jobs and prices continue to remain high.

The estimates of India’s gross domestic product (GDP) — the broadest measure of value of all goods and services produced in the country — demonstrate a deeply hurt economy hit by a toxic mix of a free-falling rupee, dipping investment, high borrowing costs and rising prices.

Read: Economy romancing monsoon: a perfect antidote to deal with industrial slowdown

From a foreign investors’ darling to an economy characterised by policy flip-flops, the Indian economy’s turnabout has been as rapid as the heady 9%-plus growth it had once clocked during 2004-2008.

Many analysts reckon it could get worse.

On Tuesday, the Reserve Bank of India (RBI) scaled down its growth forecast for 2013-14 to 5% from the earlier estimates of 5.5% as investment activity and consumer spending remains muted.

The central bank also expects retail inflation measured by the consumer price index (CPI) to hover around 9% in the current financial year.

Costlier food has pushed India’s wholesale inflation to a seven-month high in September to 6.46%, while retail inflation quickened to 9.84% during the month as flat income growth, shrinking job opportunities and high prices make getting by harder for millions of Indians during the festive season.

High inflation has also forced RBI to raise its key lending rate — the repo rate — by 0.25 percentage points to 7.75%.

A RBI-sponsored survey of professional forecasters, the results of which were put out on Monday, had projected that the Indian economy will grow at 4.8% this year, scaling down its earlier projection of 5.7%.

India’s gross domestic product (GDP) grew 5% in 2012-13, the lowest in a decade.

The government and the Reserve Bank of India, has announced a string of steps that including making loans costlier for banks, controls on foreign exchange transactions for individuals and firms and easing of foreign investment caps on several sectors such as telecommunications and defence.

The rupee’s value, despite a pull-back in the last two months, is still lower by more than 15% than its value six-months ago.

A depreciating rupee has made imported goods costlier. So, computers, imported mobile phones and gold have become costlier. It has also made crude oil imports costlier, prompt oil companies to hike petrol and diesel prices. Costlier transport fuel will knock up prices of most goods and stoke inflation.

Capital goods output, a proxy for investment activity, have also been contracting in recent months— a clear sign that firms were putting off capacity expansion plans. This has resulted in fewer job opportunities and employee retrenchments as firms battle to keep costs down.

There are no clear signs of investment pick up as sentiments continue to be very low. A weak rupee, tight liquidity, high cost of funds, procedural delays are all coming in the way of an investment revival.