The Hindu Business Line : Demand could slacken if high inflation continues: Kamath

Mumbai, May 22 The industry could face the challenge of slackening demand, if inflation continues at the current high levels and interest rate is used as a tool to contain inflation, said Mr K.V. Kamath, Managing Director and CEO, ICICI Bank Ltd and President, CII.

Speaking to newspersons here on Thursday, Mr Kamath said that slowing down of demand was visible in consumer durables, where demand dropped from an average of 30-35 per cent to 5-10 per cent.

He said, “As we go along, I hope the global situation corrects and the policy measures taken in India also help correct the situation”.

The corporate sector has not yet experienced any visible pain due to the high inflation, either on the input front or on the wage front, Mr Kamath said.

“I had expected pain in the last quarter of the last fiscal. But industry has behaved admirably in containing the pain from challenges of inflation. It has been offset by cost cutting and productivity increases,” he said.

Mr Kamath also said that he does not expect growth to slacken as the investment pipeline is robust, around $700 billion. “The large investment will cause momentum in growth. So far, we have not seen the impact of investment of this size and this magnitude. Growth will not slacken,” he said.

Primary demand

Another reason that growth is unlikely to see a slowdown is, because, in terms of trade, India is not as much dependent on the global economy, unlike China and the other South-East Asian countries. “The primary demand in India is domestic demand and we should worry about primary demand,” Mr Kamath pointed out.

Key is liquidity

Mr Kamath said interest rates would move in tune with policy signals. While signals did not indicate a dramatic increase in interest rates, there were no signs of decrease at the moment, he said. The key signal was liquidity, which was comfortable.

“Even after the monetary policy measures like the CRR hike, we still see comfortable liquidity situation and credit offtake is not matching liquidity,” he said.

Mr Kamath also said that the Fiscal Responsibility and Budget Management targets were under pressure due to slower GDP growth and off-budget items.

According to CII’s forecast, the GDP growth for 2008-09 would be between 8.28 per cent and 8.61 per cent. Potential risks include higher oil prices, global economic slowdown.

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