April.08 : There are clouds of trepidation hanging over the turnaround in growth as international oil prices have hardened to over $80 a barrel, threatening to spoil India’s growth party. Some financial pundits feel it could rise till $100. The reality is even more challenging as other commodities too — metals, steel, coal and coking coal — are also going up,
giving India Inc sleepless nights. Interest rates too might harden by the end of the year — once credit growth picks up and government borrowing increases, thus drying up the current liquidity in the banking system. The Reserve Bank of India has, however, always kept a balance between inflation and growth, and while its emphasis has been on inflation in the last credit policy, it will be interesting to see how it tackles the double-digit inflation expected in March.
But for now India Inc is worried about the next two quarters, and this worry could spill over to other sections of the population. Many of them had ordered commodities when prices were low and have to take delivery at higher prices. This not only sends their accounts askew but eats into their profits. They cannot pass on the hike in raw material costs to the consumer immediately as they will face price resistance. There will thus be a time lag. It is not that growth will not happen: it will take place, but at a slower pace. Profits will shrink, and there might be much less money for investments, which in turn will take a toll on production and sales. India Inc has been used to an easy money policy for nearly two years, and globally, while countries like China and Australia have started to exit seriously from the easy money policy, India has still not done so in any significant manner. India Inc has to find innovative ways of meeting this challenge rather than waiting for sops and concession from the government. Their main worry is this: who will fund the extra working capital needed to meet higher input costs? By all accounts, commodity prices are likely to stay high for a while due to several reasons.
Governments around the world had come out with elaborate stimulus packages, which have by and large not been withdrawn yet, and much of this has led to a rise in commodity prices. These stimulus measures also led to a turnaround in growth and increasing demand for raw material as production and capital expenditure picked up. China was one of the biggest players in the commodity markets as it went on an infrastructure spree. China will have to be watched as its reviews infrastructure spending: it usually acts with a much longer-term view, unlike this country, and has already tied up a lot of commodity investment deals in Africa, where there are an estimated three million Chinese currently working. The Indian government might do well to take a leaf out of China’s book — and begin to think ahead. It is a fact that the government’s hands are tied on providing more fiscal sops due to the huge fiscal deficit. India Inc will, therefore, have to battle high commodity prices innovatively as these are not likely to go down anytime soon.
Crisil, the rating agency, in a report released on Wednesday, said it had upgraded more companies than it had downgraded, indicating an upswing in the economy. But it has also predicted that while this trend will continue in 2010-11, “a global credit event on sovereign debt, a buildup of inflationary expectations and exchange rate volatility might yet disrupt trends over the near to medium term.” It is indisputable that both India Inc and the Indian economy face challenging times ahead.