Downside risks to dampen recovery process: D&B

Written by Sajan C Kumar | Chennai | Updated: Sep 24 2009, 04:50am hrs
Painting a not-so-rosy picture of the economy, Dun & Bradsheet (D&B) has forecast that certain domestic downside risks of the recent past may dampen recovery hopes. For one, the rainfall deficit stands in the way of growth in consumption demand. Such weak demand is detrimental to industrial growth. The other concern stems from the inflationary pressures that appear to be building up, said D&Bs Economy Observer.

While we maintain our initial view that the Indian economy would witness a sustained recovery in the second half of FY10, we may revise downwards our estimates for the pace at which this recovery would occur, said Kaushal Sampat, COO, D&B India. Given this, the monetary authority would be faced with the policy dilemma of balancing growth while containing inflation. We expect the Reserve bank of India to hike the CRR (or cash reserve ratio which is the amount of funds that banks have to keep with the RBI) by the end of the current calendar year to mop up excess liquidity from the system and reduce demand side pressures on inflation, he added.

The deficiency in rainfall will likely have a domino effect. First, it has led to a substantial decline in the area under kharif crop. The fall in kharif crop production is likely to widen the gap between the market price and the minimum support price set by the government. This would adversely affect the procurement of food grains by the government. And if all this leads to hoarding of food grains, prices of agricultural commodities will witness further increase.

Against this backdrop, the report goes on to say, the government might have to strengthen the public distribution system to reign in food prices. To add to the existing woes, the international prices of food grains and crude oil, though below their year-ago peak levels, have started rising in recent months. This, coupled with a weakening rupee, is expected to exert an upward pressure on prices of imported food articles and crude oil. In view of the high food prices, expected lower agricultural output, excess liquidity in the system and the waning base effect, the WPI inflation is expected to rear its ugly head. In line with D&Bs expectations, GDP grew 6.1% in Q1 FY10 strengthening the view that recovery in the economy would begin in the second half of the current fiscal.

While the services sector witnessed some hiccups owing to the earlier slowdown of services demand, the performance of the overall industrial sector showed some improvement. The improvement in industrial activity has continued as is indicated by the 5.6% growth in IIP (or index of industrial production, which details out the growth of the various sectors of an economy) for the manufacturing sector during May-July 2009 compared to 0.1% during February-April 2009, said the report.

Meanwhile, the positive growth in 15 out of 17 industrial groups in July 2009 provides a glimmer of hope for a sustained industrial recovery. And the double-digit growth in the consumer durables segment for the fourth consecutive month suggests improving demand and augurs well for the industrial sector in general.