The rate hike of 0.25 per cent announced on Friday by the Reserve Bank of India (RBI) — the 12th successive hike since January 2010 — is likely to depress industrial growth, say voices representing industry in Karnataka. “Ironically, the RBI move, ostensibly aimed at taming inflation, is unlikely to result in either lower inflation or promote growth,” said J.R. Bangera, president of the Federation of the Karnataka Chambers of Commerce and Industry (FKCCI).
The serial hikes in the base rate — the rate at which the central bank lends money to banks — have resulted in the floor rate of interest increasing by a whopping five percentage points within a span of 18 months. Although the situation is still far from a full-blown recession, a slowdown is already evident, Mr. Bangera told The Hindu.
To make matters worse, the overhang of expectation that further rate hikes are imminent — the next RBI review of rates due in October — has cast a shadow on fresh investments. There are fears that the festive season that commences shortly, which is normally a time when there is a spike in demand for a range of goods, may not be as profitable this year.
Industry sees the rate hike as only one of three blows delivered against it since Thursday evening. The petrol price hike, announced on the eve of the RBI announcement, was the first blow. And, the curtailment of the Duty Entitlement Pass Book (DEPB) scheme, which was also announced on Friday, is seen as being a deterrent against exports. “This is actually a triple-strike against industry,” a leading city-based industrialist told The Hindu.
S. Chandrasekhar, Chairman, CII Karnataka and Managing Director, Bhoruka Power Corporation Ltd. said: “The cost of doing business has increased considerably in recent months.” The higher costs cannot be entirely passed on to consumers because demand is flagging, he added.
Industry sources identify several sectors that are immediately vulnerable. Demand for automobiles, particularly cars, and to a lesser extent, two-wheelers, is likely to be lower because of the sharp increase in the cost of finance for purchasing them. The fuel price hike is likely to dampen demand further, said Mr. Bangera. Industry sources fear that the demand for consumer durables such as consumer electronics and white goods are likely to be impacted.
Real estate is likely to be affected by the steep increase in the cost of housing finance in the past year. The sharp increase in the cost of raw materials such as cement, steel and bricks are an additional burden.
Mr. Chandrasekhar said calibrated withdrawal of the DEPB scheme, which is to commence from October 1 “could not have been more ill-timed”. It may be recalled that additional incentives were introduced after the onset of the global meltdown as part of the Union Government's “stimulus package” for exports. The withdrawal of the incentives is due to commence even as the main export markets are entering a phase of heightened uncertainty because of the debt crisis in Europe and elsewhere, said Mr. Chandrasekhar. “Sectors such as auto components and textiles are likely to be more severely affected,” he added.
Asked if the festive season may be spoilt by a slowdown, Mr. Chandrasekhar said: “The only silver lining so far has been the good monsoon which may boost rural income.” He said demand for basic consumer articles such as soaps and detergents may not suffer as a result.
“The picture is certainly not gung-ho among the Chief Executive Officers (CEOs). Most of them have put expansion plans on hold, and conserving cash for the more difficult days that lie ahead,” he said.