India Inc fears spending cuts

Written by Neha Pal | Neha Pal | Sunny Verma | Updated: Jul 27 2011, 07:30am hrs
With household spending already impacted by persistent inflation and high interest rates, Tuesdays 50-basis point hike in policy rates could further erode the capacity of domestic consumption demand to push growth, fear companies witnessing a decline in sales. With the latest rate increase in the context of a visible decline in investment a section of analysts has also begun to wonder if the economic slowdown could become more broad-based in the current quarter and next.

Growth in interest-rate sensitive sectors such as automobiles, real estate and consumer durables would be adversely impacted by the RBIs higher-than-excepted rate hike, analysts and players in these sectors concurred.

In its monetary policy review, the RBI acknowledged that growth was beginning to moderate, even though there was no evidence of a sharp or broad-based slowdown as yet.

Consumer durables grew at 5.2% in May 2011, down from 14.7% in May 2010, industrial production data released earlier this month had said. Sales growth at car-makers including Maruti Suzuki India slowed to two-year low in June, as per data from the Society of Indian Automobile Manufacturers. Commercial loans given by lenders such as ICICI Bank rose 19.61% as of June 24, the least since September 2010, as per RBI data. Similarly, the overall industrial output growth has been lackadaisical. IIP grew only 5.7% in April-May 2011, as compared to 10.8% in April-May 2010.

Higher interest rates and fuel costs have already dampened car sales, which grew nearly 30% in 2010-11. Over the last 15 months, interest rates have gone up by three percentage points. In April-June, total car sales stood at 4.65 lakh units, compared with 4.33 lakh units in the corresponding quarter last year with a growth of just 7%.

Indias top three car makers Maruti Suzuki, Hyundai Motor and Tata Motors cumulatively grew just 1.5% in April-June.

Tata Motors sales, in fact, dipped 13.5% to 54,346 units.

Maruti Suzuki CFO Ajay Seth said on Tuesday the company's discounts would go up in the following quarters owing to the negative sentiments in the market primarily because of a higher interest rate. There has been a series of interest rate hikes which is impacting demand, he said.

SIAM president Pawan Goenka said the RBI move could hit auto sales very hard. Although some moderation in growth was expected, it has turned out to be far more than forecast. High interest rates lead to postponement of vehicle purchase, which will have a negative impact on short- to medium-term sales, he added.

Growth in the consumer durable sector is also beginning to falter. Industry players have scaled down the LCD segment sales growth target to 50-55% in 2011-12 from the earlier projection of 75-80%. Air-conditioner sales are growing only 15-17% in 2011-12, as against a target of 30-35%.

Companies including LG, Panasonic and Videocon have seen a slowdown in demand for air conditioners, refrigerators and washing machines. Indian consumers who have seen no moderation in inflation, are cutting down on the demand for consumer durables, said NV Sivakumar, India leader for retail & consumer practice at PricewaterhouseCoopers.

Manish Sharma, director (marketing), Panasonic India said: The consumer durable industry is witnessing a slump in demand for products like LCD TVs, ACs and washing machines. The hike in policy rates by another 50 basis points is going to aggravate the situation.

Mahesh Vishnu, vice-president, (home appliances), Samsung said: The rise in interest rates is going to impact consumer sentiments and is going to put a pressure on the buying power of consumers.

For the real estate sector, RBI's moves would mean higher property prices and lower demand for housing and commercial projects.

The move has come as a surprise to us. We were expecting a moderate hike of 25 basis points, but hiking rates by 50 basis points is going to dampen the growth, said Pradeep Jain, chairman, Confederation of Real Estate Developers Association of India. He said it would make cost of funds expensive for developers as well as buyers. This would result in an increase in property prices, he said.