The Hindu Business Line : Economy can absorb petro-price shock

"THE prospects for the Indian economy remain encouraging," says a study by the Corporate Studies Division of the Department of Statistical Analysis and Computer Services of the RBI.

But the study published in the RBI Bulletin (August 2005) warns, "The envisaged expenditure which has grown for the past three years is susceptible to a slowdown due to its cyclical nature. The planned investment for 2005-06 based on projects which have been sanctioned financial assistance in the years prior to 2005-06, amounted to Rs 42,144 crore. The aggregate capital expenditure in 2005-06 would also include capital expenditure on projects sanctioned assistance in that year. "Therefore, if the aggregate capital expenditure in 2005-06 has to show growth over than that in 2004-05 (i.e. Rs 69,140 crore), the capital expenditure in 2005-06 on new projects must be over Rs 26,996 crore. Since business conditions remain conducive to support corporate investment demand and lending rates remain low while corporate balance sheets are in a generally sound position, such an amount of investment in 2005-06 on new projects, sanctioned assistance, seems to be very likely. In other words, 2005-06 may witness an increase in corporate investment when compared to that in 2004-05."

For obvious reasons, the study limits itself to insufficient rains in June though the monsoon picture has changed for the better by August. Yet, it makes an important point that "given the base effect arising from low growth last year and the fact that the rabi crop now is almost as important as the kharif, agriculture is expected to contribute positively to the overall growth in 2005-06."

Manufacturing, with a 6 per cent or more growth in each of the last three years, seems to be less dependent on the farm sector (which saw two bad monsoons in the last three years) and could be partly explained by a rise in exports.

The current study covers projects assisted by IDBI, ICICI Bank, IDFC, ILFS and public sector banks in 2004-05 and also all projects sanctioned assistance prior to 2004-05 that have capital expenditure lined up in 2004-05. Total project expenditure of all the projects sanctioned help in 2004-05 came to Rs 97,270 crore, against Rs 72,940 crore in 2003-04. But the study has not factored the impact of punishing crude oil prices.

Players on Mint Street are unsure. Inflation could top 5 per cent if and when the Government marks up prices of petroleum products, which could work up the RBI to mark up interest rates despite excess liquidity in the system. One could argue against the RBI stirring the soup, as inflationary cover will be provided by good kharif and bumper crops. Some question the premise of pushing up interest rates to put down inflation when there is loose cash in the system.

Rising interest rates could filter into the system pushing banks to hike their sub-PLR lending rates braking growth. There is a disconnect between bank lending and market rates; the median lending rates on demand and term loans (at which maximum business is contracted) of the public sector banks is between 8 per cent and12.15 per cent and 8.15 per cent and 11.90 per cent respectively as of June 2005.

With banks cutting each other to garner business, interest rates for most corporates are slightly lower. The Financial Times (August 17) has a front-page report that says high fuel prices could slow the global economy. In the event, exporters from India will have a job to do. Dollar inflows into India could get trimmed to earn more in US but that is a fear hard to locate. Interest rates in India and the stock indices offer some of the best returns; and, at this point of time, a jump in retail prices of petroleum products looks a digestible proposition.

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