An encouraging trend in exports, an
impressive 8 percent core sector growth in September, a
strengthening rupee, a softening CAD and recovering stock
markets — it all appeared positive, but the picture changed
suddenly in the last few days with both the Sensex and the rupee
suffering a setback on their recovery (though recovered Thursday
and yesterday), and more importantly, factory output registering
a sluggish 2 percent growth in September, and inflation, both
wholesale (7 percent) and consumer price index (10.09 percent),
spiking up all over again in October.
I would like here to invite your
opinion on high inflation and its affect on your business. How
much you feel pinched by cost increases — energy, raw materials,
machinery and components, office maintenance, supply chain,
insurance, and other costs. Do you think the shoot up in prices
is putting a spoke in your factory wheels? And if you are a
small business, do you find it difficult to negotiate with your
suppliers because of your size? Can you easily pass the extra
costs to customers? Do you often suffer due to sudden price
rises as you're already under contract to deliver goods at a set
price?
And there is a double whammy effect
of inflation — every time it rises sharply, it also raises
chances that the RBI may lift interest rates further in its next
monetary policy and thus would further worsen the credit flow to
the industry which has long been facing a difficult time due to
costly credit. This time again, a RBI policy review is ahead in
the next month and it is widely feared that the high inflation
figures will keep the RBI singing a hawkish tune in an effort to
tame down roaring inflation — a strategy that has hit industry
hard in the past.
Now let's have a look in which
areas our industry is not performing as reflected by the
September IIP figures. The manufacturing sector, which
constitutes over 75 percent of the index, grew by a meagre 0.6
percent in September despite double-digit growth in exports in
the month. In addition, capital goods output slumped by 6.8
percent and consumer durables contracted 10.8 percent,
indicating that both business and consumer sentiment have still
remained weak.
I don't think the recent setbacks
are strong enough to drag down the economy, neither the industry
has turned the corner, but it is clear a true revival is still
some way away, and at this juncture while the industry shouldn't
be jittery, the policy makers shouldn't be complacent, and the
latter should leave no stone unturned to propel industrial
growth as well as exports and to rescue the industry,
particularly the small and medium enterprise sector, from the
labyrinth of high inflation the reaction to which I don't think
should always be interest rate hikes. Removing supply hurdles
and infrastructure bottlenecks is no less important.
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