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Prepare to tighten the purse strings

A worrying fiscal deficit, stagnant interest rates, stubborn inflation and a weak rupee are prompting everybody from business tycoons to students to cut back on expenses. Gaurav Choudhury writes. Feeling the pinch of an ailing economy

india Updated: May 27, 2012 02:01 IST
Gaurav Choudhury

The rise in prices is bringing more tears to the common man than what the costly onions or high petrol prices suggest. Consider what Heena Sardana has to say. “Shopping and eating out are the two biggest casualties of inflation. Also, I have started spending less on cosmetics and curtailed visits to beauty parlours as my pocket money is not adequate,” says the Delhi college student.



Hemmed in by the worrying fiscal deficit, interest rates that stay put, inflation that refuses to come down and a weak rupee, everybody from tycoons expanding their businesses to students mining their pocket money and the government is coming around to a mood of trading down or austerity after seeing the writing on the wall. http://www.hindustantimes.com/Images/Popup/2012/5/27_05-pg-13a.jpg

The man in the middle of the muddle, finance minister Pranab Mukherjee, who recently said that he will announce some “unpopular” austerity measures to curb government spending, has to find a way out as rising prices and sliding growth remain key worries for the government strung in a by a heavy debt burden. Almost all everyday products and services — from food to footwear, movie tickets to medicines, from restaurant meals to deodorants and lipstick — have turned dearer in the last 12 months hitting family budgets hard. The same amount of money now buys fewer goods.

In the last three years, home loan EMIs have only gone up. Family budgets are squeezed by cutting down on regular expenses — even on items such as clothes and consumer durables.

Costlier borrowings have also prompted consumers to defer purchases of goods such as cars that are mostly bought through loans.

“We had wanted to buy a LED TV but have put it on hold, till don’t know when. We had also planned to go in for a new car, but are really thinking whether to or not, given the petrol price hike,” said Sumati Parama, a Noida-based homemaker.

Policy pronouncements such as a retrospective tax on older corporate transactions such as the Vodafone-Hutch deal and uncertainty over general anti-avoidance rule (GAAR) has dented India’ image as an investment hotspot sparking fears among global investors.

As foreign investors pull out from Indian equities, the rupee has slid. A depreciating rupee, which has breached the 56 to a dollar mark, has made imported goods costlier. It has also made studying and travelling abroad costlier as buying dollars become expensive.

“I can’t leave the course midway, even though a couple of my batch-mates have dropped out as they could not bear the increased expenses,” said, 20-year old Anuj K from Delhi, who is pursuing a four-year business administration course at a US university.

Companies that borrowed dollars from overseas banks will be the worst hit as repaying loans will become costlier. Imported raw materials such a copper, aluminum and machinery will turn costly and squeeze profit margins.

According to Manufacturers Association for Information Technology (MAIT), in last one year, prices of consumer goods have surged over 10%-20% due to the rupee’s depreciation.

“Another round of price hike is justified and the entire industry will respond to it by next month,” said Alok Bhardwaj, senior vice president, Canon, who also heads MAIT.

“We are increasing the prices by at least 3% due to the continuous increase on input cost. Most of our appliances are imported from Thailand and Malaysia and it is imperative for us to consider the price hike,” said Manish Sharma, managing director, Panasonic India which has increased prices of refrigerators and washing machines in January by 4%.

Sluggish industrial growth has led to deceleration in the broader economy, resulting in slower GDP growth.

Last month, US-credit rating firm Standard and Poor’s (S&P) and Moody’s on Wednesday raised fresh questions over India’s economy hit by high government borrowing, rising imports and political compulsions that have stalled reforms in key areas. http://www.hindustantimes.com/Images/Popup/2012/5/27_05-pg-13b.jpg

Finance minister Pranab Mukherjee admitted that S&P’s comments on India’s worsening fiscal health will have some “perceptional impact”.

“Government has taken note of these concerns,” Mukherjee told the Lok Sabha in a written reply.

Costly borrowings and inputs have dampened investments as firms defer capacity expansion plans, hurting job prospects and companies have pruned wage bills to cut corners in difficult times.

“At a time like this, when cost competitiveness is going to be very important, we need to be very mindful that we create a platform for dialogue between employers, trade unions, employees and the government to create a win-win situation,” said Rajeev Dubey, president of Employers’ Federation of India, who is also the president of and member of the group executive board of Mahindra and Mahindra.

Slow growth can hurt the government’s tax revenues that may force it to borrow more and curb spending to fund its welfare and routine activities. In the past, Parliamentarians and ministers were not particularly happy with expenditure control measures such as a ban on ‘business class’ air travel. India’s economic growth is estimated to slowdown to 6.9% in 2011-12, the final data for which will released later this month, the slowest in three years. Amid these notes of despair, there are voices of optimism.

“I think India will grow at close to 7% in 2012-13. Agriculture will grow at almost the same rate as last year while services will remain robust and manufacturing will accelerate,” C Rangarajan, chairman of Prime Minister’s Economic Advisory Council said.

(with inputs from Himani Chandna Gurtoo)