INFLATION BURNINGS

The RBI came up with another round of old fashioned rate hike to control inflation. We have already witnessed 7 rate hikes within 2010-2011 to control the food inflation. Every time we find RBI using words related to control the devil of inflation by compensating growth, but this time their was a twist in the tale. This is the first time RBI is more concerned about the slowing growth of emerging economies including the Home country.

The emerging economies are facing the heat of paying more import bill due to rising oil prices. Everything cannot be blamed on tension among Middle East about rising crude prices. When the emerging economies are going to bring new GDP figures for their economies like India being projected to bring 10% GDP growth, demand of crude is bound to increase along with the price increase. India is grappling with the problem of poor and low crops cultivation. That’s one of the biggest reasons for higher food inflation. Despite a good monsoon in 2010-2011 India enjoyed the flavour of 18% food inflation. Keeping this in mind this year the Union Budget proposed to set up and spend funds on building food storage infrastructure and also, in order to promote agriculture activities, refined the loan rate structures.

Non food items have dropped under the production ladder reflected through index of industrial production (IIP).  India's factory output rose by 3.7% in January - the biggest blow of the game to capital goods segment. Capital goods output contracted 18.6 % in January in a sign that higher cost of credit and rising input cost pressures may have forced companies to defer planned investments.

REELING EXPORTERS

If we look towards the exporters we find that they are also reeling under the pressure of higher cost of exports. Micro, Small and Medium Enterprises (MSMEs) which contribute to 45% of the countries export are the one who are worst hit. FIEO Chief however expressed his concern that the IIP has shrunk from 16.8% a year ago to 12.10% a quarter ago and is only 3.7% currently.  The high cost of credit has dampened plans of expansion and capital expenditure and would hit ‘Profit After Tax’ (PAT) of most companies in Q4. 

If we club all the punches we find that export, industrial growth and purchasing parity all went into a tailspin in order to control food inflation. The prices of protein sources such as milk and ‘eggs, meat and fish’ continued to remain high reflecting structural demand-supply imbalances and poor infrastructure facilities of storage.

WRONG TREATMENTS

It seems that the problem was somewhere else and we were doing the treatment at some other places. After making a wrong treatment RBI is now under the threat of slowing growth due to the rising cost of loans. India is still about to witness in the coming two quarters the slow down in corporate earnings. Their will be significant drop in margins of profitability and rising cost of operation followed with higher interest cost, eating up much of the dividend of the financial year 2011-12.

In the third quarter RBI has projected the WPI to be around 7%. Indian government is going to face some tough situations due to the increasing fiscal deficit due to the rising import bill of crude. The planned expenditure of Indian government will take a hit from the rising crude bill. Moreover companies are eagerly passing out the higher cost of loans to the consumer and hence monthly expenditure are now double and savings of Indian citizens are now running half of what it was in 2009. The financial yardsticks of India like direct and indirect tax collections, merchandise exports and bank credit suggest that the growth momentum persists giving some great signs of ‘Not Too Much Bad’ but the damage is happening to some other corner of the same room.

STEROIDS OF LIQUIDITY

As interest rates have been hiked to suck out the excess liquidity from the market to control food inflation, but at the same time the Indian market was injected with a Steroid of liquidity. Net liquidity injection through LAF declined from an average of around 93,000 Crore in January to 79,000 Crore in February 2011 and further to 68,000 Crore in March (till March 16) mainly due to increase in government spending and consequent decline in government cash balances with the Reserve Bank.

In between these times of low interest rate to high rate, companies who took off the projects for expansion are the worst hit and struggling to scout for easy liquidity. This very particular factor is one of the prime factors why china is providing easy funding (funds at low interest rate) to the Indian corporate. This same factor can spook off another round of unauthorized improper quality of loan disbursement. Since banks will be busy to win the race of higher loan disbursement, quality of loans and quality of expenditure are going to be the prime agenda of Indian financial streets.

SOME GOOD NEWS

One good news among all these hiccups is that the area sown under the Rabi crop is higher than the last year which augurs well for agricultural productions. This will provide healthy foods for the financial year 2011-2012.

At last I would like to accentuate the thoughtful minds of my readers. RBI rate hike, higher cost of interest rates and consumers paying more for their purchase are some areas where one finds the realities of financial inclusion of India. When Budget comes we raise voices of financial inclusion. But with rising inflation financial inclusion disappears. Without being an inclusive one, financial and economic stability cannot be sustainable. India needs to identify the areas where we can control and cut off the interest rates. Financial inclusion is about credible access to appropriate financial products and services needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. If Indian financial regulators concentrate on this, India can avoid fiscal imbalance and will be able to control food inflation by focusing on higher production of crops. Urbanization should be seized and should not be allowed further to expand where it destroys agriculture land to a Multi Complex.

THE EFFECTS

Emerging economies are rattled with inflation and Indian economy is not only inflated but also facing the wrath of high petrol and diesel prices which have a greater link with the wallet of the end consumer. India must look for alternate energy resources so that inflation can be controlled. We are focusing on infrastructure to a much greater extent but we are not aware that this infrastructure will be of no use if inflation keeps on climbing and making the infrastructure projects more costly with less profit and less dividend for the share holders.

Indian industries need to focus on the composition of funding. A prudent mixture of equity and debt needs to be arranged so that cost of high interest does not affect in the course of delayed execution of projects. This is one of the most important aspects we need to keep in mind when planning or executing cash flow structures of a project. We should not forget that all projects in India are completed with a delay tag where cost of the project goes up substantially by a around 30%-40% of the initial cost of the projects. We need to keep an eye on this.

(Author is a Financial and Economic Analyst)

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