By some accounts, the economy?s still going strong. Take the sales of commercial vehicles at Tata Motors which were up a smart 19% y-o-y in April with the smaller trucks selling even better?LCV volumes are up 28%. Rajiv Bajaj says his company has turned out what?s possibly the best ever volumes in April ? the numbers speak for themselves.
So although the managements at firms like Maruti may have turned a tad cautious telling us that footfalls are slowing and that fewer visitors to the showrooms are actually buying cars, it doesn?t seem like demand, in the entire auto space is falling off. Sure, loans are beginning to cost more and when a rise in petrol and diesel prices is imminent, it?s hard to convince someone to buy a car. Especially when one is already paying more for almost everything else.
But cement companies seem to be able to find buyers and at a good price too?look at how good realisations were in the March quarter. It?s possible there could be fewer buyers for cars or trucks especially if diesel prices go up and upset the economics of fleet operators. Indeed although the factory output number for February, which showed a growth of 3.6% year-on-year was disappointing to say the least, the HSBC PMI has held up very well indeed coming in at 57.93 for both February and March and at a slightly better 57.96 for April, the highest in the last six months.
It?s true that orders in general, and for exports, are somewhat lower than one would have liked but it?s too early to draw any conclusions just yet. Also, the first lot of corporate results for the three months to March 2011 suggests that margin pressures remain and are here to stay; CRISIL estimates profitability will continue to fall in 2011-12.
That?s not such a disaster really as long as profits grow at a reasonable pace. That however, will not happen if we?re going to continue paying more for our daily needs. Inflation now is expected to average at least 9% for the next six to seven months having come in at 9% for March way above the Reserve Bank of India?s (RBI) projections. It?s time the central bank sent out a clear signal on inflation and that?s why a 50 basis points hike in policy rates is called for.
It?s possible that there could be fewer takers for money and companies would further postpone capacity additions. But inflationary expectations need to be anchored and if banks need to absorb some part of the higher cost of money, for some time, so be it; in any case they will not be able to lend at very high rates since beyond a point there won?t be any borrowers. The markets could be spooked because growth will slow down for sure and perhaps GDP growth this year may ultimately come in at sub-8%. But growth is slowing down elsewhere in the world too including in the US.
The good news is that there will be ample liquidity globally so money will move out in search of the best returns; indeed the recent rally in the Sensex from its February lows has been driven by some $3 billion worth of foreign flows. So even a moderately good show from India Inc would attract money.