Speedbreakers on growth highway
Close to its all-time low, the rupee has companies worried at a time when industrial output growth has been declining and hit a two-year low in September at 1.9% year-on-year. HT reports.Goods costly, borrowing costlier, & prices over the roofbusiness Updated: Nov 11, 2011 23:25 IST
“We run companies. We do not know how currency markets operate. Volatility doesn’t help us because we do not know how to hedge on a daily basis,” a Tamil Nadu-based leather goods manufacturer and exporter said.
As the head of a company that exports footwear, he is a small businessman with a big worry — the cost of raw materials like leather and shoe uppers are rising rapidly every day, as the rupee declines in value.
Close to its all-time low (it breached 50 to a dollar recently), the rupee has companies worried at a time when industrial output growth has been declining and hit a two-year low in September at 1.9% year-on-year. Industrial output accounts for 17% of the country’s GDP.
Slow manufacturing hurts corporate profits and employment prospects at India’s 160,000-odd factories that employ about 110 million people.
Many companies have withdrawn plans for share offerings, two public sector companies (giants ONGC and Steel Authority of India) have postponed disinvestments, and 42 companies are waiting for an opportune time to sell shares.
The strategy of the Reserve Bank of India: raise interest rates to mop up money, slow down the economy and lower inflation. It’s working — partially. The economy is indeed slowing — but inflation is at its highest in 16 years.
“In our family shopping and eating out have come down sharply in the last few months. Also, I have started spending less on cosmetics and parlours as my pocket money is not adequate,” said Poorva Sharma, college student in Delhi.
Poorva’s is not a solitary tale. Call it the big squeeze.
Persistent rise in prices have hit families across regions and income scales.
RBI last month hiked the interest at which it lends to banks — or the repo rate — by 0.25 percentage points to tame inflation, the 13th time in 19 months, causing installments on home loans go up yet again.
Costlier borrowings have prompted consumers to defer purchases of goods such as cars, which are mostly bought through loans. Car sales growth in the Diwali month of October slid by 24%, the slowest in a decade.
Car sales have now dropped for four consecutive months.
“The market condition continues to remain challenging as interest rates and rising fuel costs have led to consumers postponing their purchasing decisions. Only new launches and diesel cars are witnessing any demand and for existing models it is a very difficult time,” said Arvind Saxena, director sales and marketing, Hyundai Motor India Ltd.
The prospect before the government is rather worrying: controlling prices may have hurt consumption demand, the edifice of the India growth story at a time when the world is seeing a slowdown. The country seems to be losing its insulation.
For exporters, a falling rupee is generally considered good as they get more rupees per dollar. However, shrinking global demand would affect orders, negating the gains from a weaker domestic currency.
Exports growth moderated to 10.8% in October as orders from countries in Europe — India’s largest market — dried up.
For importers, the equation is clear: a falling rupee means they have to pay more in rupee terms to buy the same products — capital goods for heavy industry and intermediate products like shoe uppers as in the case of the leather manufacturer from Tamil Nadu, for instance.