With interest rates likely to remain elevated as the Reserve Bank of India (RBI) leaves liquidity tight in its fight against the falling rupee, Indian industry could see more pain in the months ahead. The impact of any structural reform, in the form of concrete investments, is likely to seen only in the last quarter of the fiscal; currently, both corporates and consumers remain cautious about spends.
Growth is likely to slow further as the RBI will need to keep liquidity tightening measures in place and heightened macroeconomic uncertainty dampens domestic demand, Leif Eskesen, chief economist at HSBC Global Research, observed in a note.
In evidence that demand remains anaemic, showing no signs of revival, sales volumes of commercial vehicles (CVs) at Ashok Leyland fell 24% year-on-year in August while at Tata Motors they came off by 26.5% y-o-y; at Mahindra and Mahindra (M&M), volumes dipped 18% y-o-y. The continuing ban on iron ore mining and shortage of coal threaten to disrupt production of steel and power while high crude oil prices will add to raw material costs.
In other data, cement output rose by just 0.8% y-o-y in July while construction activity remained slow construction sector growth for Q1 FY14 was 2.8%, the lowest since Q3 FY09. In an environment where upside risks to inflation persist thanks to a weakening currency, earnings this year for the 30 Sensex companies are expected to grow at sub-10% over FY13.
Much of the slowdown was captured in Indias GDP growth of 4.4% in the three months to June 2013, the slowest pace recorded in 16 quarters. What will add to industrys worries is the possible outflow of capital following an early tapering of QE3 by the US Federal Reserve. Growth will also be hurt by the governments need to scale back expenditure, if the finance minister is to meet his commitment of reining in the fiscal deficit at 4.8% of GDP. With the fiscal deficit for the April-July period having hit 63% of the budgeted R5.4 lakh crore for the current year, the 4.8% number appears to be in jeopardy.
Deputy chairman of the Planning Commission Montek Singh Ahluwalia, hinted last week that the plan expenditure budgeted at R5.5 lakh crore may need to be trimmed, saying it would be reviewed in November. Within this, the bigger casualty could be the capital expenditure now estimated at Rs 1.1 lakh crore.