The UPA government and the Reserve Bank of India (RBI), which successfully steered India through the world’s worst economic crisis in eight decades, are now faced with a challenge that appears even bigger: controlling prices without hurting consumption demand, the cornerstone of the India growth story — as signs of a trade-off between the two are clear.
RBI governor Duvvuri Subbarao on Tuesday slashed the current year’s (2011-12) GDP growth forecast to 7.6% -- the lowest in three years -- amid signs of weakening investment and consumption activity.
Bank credit has slowed down in most sectors over the last six months, hit by deceleration in investment demand --or corporate spending on new facilities.
Economists said the RBI’s policy statement that accompanied a 0.25 percentage point hike in policy rates -- the 13th in a relentless19-month push - to squeeze demand and contain inflation reflected its uneasiness about the India growth story.
“The assessment focuses more on the downside risks to growth than before but continues to highlight its discomfort with high inflation,” said Rajeev Malik, senior economist at broking and research firm CLSA, Singapore. “This is different from the earlier two assessments where the focus was much more on checking inflation even at the expense of slower growth.”
The latest bank data contain strong signals of a consumer spending slowdown: transactions in consumer durables, vehicles and real estate are all down.
Consumer durable loans contracted by 16.4% between April and September, 2011, compared to 9.5% in the year-ago period, implying that more people are postponing purchases due to high prices and costly loans, and focussing on essentials.
Growth of vehicle loans also decelerated to 5.9% during the first half of the current fiscal year, compared to 10.3%
last year, as successive rate hikes and surging fuel prices hit car sales.
Loans disbursed for commercial real estate also slowed down sharply to 2.3% during the first six months of 2011-12 from 10.3% a year ago.
“We are already witnessing a high interest rate regime which is having the twin effects of deterring investments for growth, including in crucial sectors like infrastructure, and discouraging consumers from spending,” said Harshpati Singhania, managing director, JK Paper Ltd.
“Investment demand has slackened, reflecting slower clearance and execution of projects, concerns about inflation and rising interest rates,” the RBI said.
The country's top carmakers like Maruti, Hyundai and Tata reported muted sales during the festive season this year compared to the previous two years.
“The excitement this year is not as high as it was last year and the year before,” said Arvind Saxena, director (sales and marketing), Hyundai Motor India Ltd. “Due to the Eon launch, we will still grow but industry growth would be marginal at best.”
Construction and realty firms, hit by low demand and weak fund availability, expectedly gave a thumbs down to the latest rate hike.
“RBI has put real estate in a sorry situation,” said Pradeep Jain, chairman, Parsvnath Developers Limited, who also heads industry body Confederation of Real Estate Developers’ Association of India (CREDAI). “It is a vicious circle of higher input cost, higher borrowing cost and higher property prices.”