By V. Ramakrishnan, Reuters
Mumbai: Indian consumers may be feeling the effects of a year of interest rate rises, but full corporate order books and strong investment spending suggest the economy has lost only a bit of froth and underlying growth is robust.
Central bank measures to rein in credit growth are beginning to bite and growth in motorcycle sales — a good pointer to consumption in a country where a car is beyond the means of most people — is slowing.
For companies, it is a different picture. Analysts say capital goods demand is strong and the economy, estimated to have grown by a cracking 9.2% in fiscal 2006/07, has a pipeline of investment to keep it revving at about 8.0% this year.
“If you look at the order books of any of the capital goods manufacturers, they are all chock-a-block,” said Manju Ghodke, an economist at engineering and construction firm Larsen & Toubro Ltd.
“It is the consumer end of the market which has faced the downturn because that is where it has started biting.”
The central bank stepped up the pace of tightening towards the end of 2006, although not soon enough to stop wholesale price inflation touching a two-year high of 6.7% in January.
Annual inflation has now dropped below 6% and, while real estate data is hard to come by, anecdotal evidence suggests activity in the property market, which was a source of concern to the central bank, has cooled. Home loan rates have risen three percentage points to about 11% in the past year.
The official lending rate stands at 7.75% and banks’ reserve requirements have been raised by 150 basis points since December as the central bank tightened its grip on surplus cash.
Credit growth, which was running at 30% annually, has retreated to about 28%.
Slower But Not Slow
Ghodke said companies’ capacity utilisation was still running above 90%.
There are signs that manufacturing activity may be moderating. The monthly manufacturing purchasing managers’ index hit its highest level in the survey’s two-year history in October but March’s survey showed the slowest pace of growth to date and there was only a small rebound in April.
Official data, too, shows industrial growth has fallen away from 15.4% annually in November, its fastest pace in more than a decade.
Major business confidence indexes fell between December and March, with firms particularly concerned about demand in consumer-facing industries like housing, cars and textiles.
Sales at Bajaj Auto Ltd, India’s second-largest two-wheeler producer, were 10.4% lower in April than a year earlier.
A wild card in consumption is the annual monsoon. Farming, which makes up about a fifth of the economy, is crucial in determining demand for cars and household goods. The weather office has predicted a near-normal monsoon this year but the rainy season, which starts in early June, can be erratic.
The central bank forecasts growth of 8.5% in the fiscal year from April and said in its policy review last month there was “innate buoyancy” in industry and services.
Investment bank CLSA said in a research note that monetary tightening would not hurt the investment cycle, although it had slowed consumer lending as the central bank wanted.
“It will require an extremely negative shock to cause the corporate sector to curtail suddenly its present aggressive investment strategy,” it said.
Harish Menon, an economist at ING Vysya Bank, said companies would continue to have ample access to credit.
“Getting money for investment purposes will not be a difficult task for corporates in India,” he said.
Past Its Peak
Nonetheless, Robert Prior-Wandesforde at HSBC in Singapore said the economy had probably passed its cyclical peak.
“Although we doubt that there is enough in the way of policy tightening to deliver a period of sub-trend growth, or at least not yet,” he wrote in a research note.
Like the majority of analysts in a recent Reuters poll, Prior-Wandesforde saw one more increase in both the reserve requirement and the main lending rate this year.
D.K. Joshi, principal economist at rating agency CRISIL, saw only a gentle slowdown as the investment cycle remained strong.
“It hardly matters if the economy slows from 9.2 percent to 8.5 percent,” he said. “Growth will still be strong because incomes have risen, there has been productivity enhancement and manufacturers now know how to protect their margins.”