Ludhiana, July 31: The interest rate hike by the RBI has spelt a doom on manufacturing sector. The interest rates are now higher by 4.75%. Ever since RBI’s current rate hike cycle started in March 2010. The burden of inflation is totally borne out by the monetary policy of RBI whereas the fault lines are somewhere else.
The history of acutely rising inflation started from the year 2008-2009. Minimum Support Prices (MSP) of most food grains remained almost stagnant between the years 2002-2003 and 2007-2008. For instance the average annual increase in MSPs for paddy was 4%; cotton 1%, jawar 4%, moong dal 5%; ground nut 3% and soya bean3%. However all of a sudden in 2008-2009 the MSP were increased very sharply. For paddy it increased from Rs.645/- per quintal to 850 (32%); for cotton from Rs. 1800 to 2500 (39%); jawar from Rs. 600-840 (40%); moong dal from Rs. 1700-2520 (48%); ground nut from Rs. 1550-2100 (35%) and soya bean from 910-1350 (48%). The sudden sharp increase in MSP was accompanied by NREGA and bank loan waiver. The combined fact of these resulted in a spurt of inflationary trend which is continuing. This was a master political stroke which harmed the economy at large. The main three components of inflation pertain to food, fuel and manufacturing products. Unfortunately all three are showing ever increasing trend.
RBI’s monetary policy alone will not be able to contain inflation but it will certainly take a heavy toll of manufacturing sector. This in turn will translate into a deeper gloom for the economy and the social structure by way of unemployment.
RBI is still persisting with this cyclic increase in the interest rates it looks we are going back to the era of 1995 when the bank rates were around 20%. At that time the global competition was not as cut throat as it is obtaining now.
Punjab’s economy is dominated by MSME sector and this sector is likely to get the harshest beating of higher interest rates as it is most vulnerable. Large units have opening to international borrowings like external commercial borrowing at much cheaper rates. Moreover banks are always at their beck and call. On the other hand MSMEs have to depend solely on local borrowing. As a regards the cost of capital the entire cry is on ever rising interest rates. Coupled with these are the exhorbitant processing charges of the banks. Shri P.D. Sharma, President, Apex Chamber of Commerce & Industry (Punjab) has been consistently writing to RBI to restrict the banks from resorting to higher processing charges. In fact the processing charges translate into interest burden of around 2-3%. Shri Sharma also requested RBI to restrict the lending rate for MSME sector on the analogy already existing. Lending rates to MSME sector has been restricted to ±2% of PLR. Similarly with the shift to base rate this sector should be charged interest of ±2% of base rate. RBI in its reply to Mr. Sharma’s letter dated, 22nd June 2011 has shown helplessness in this matter.
The NPAs in the banking sector are rising alarmingly. It was revealed in the Rajya Sabha by the government that NPAs for the calendar year 2009 increased by 30% over the previous year. This trend is certainly on the rise. Banks are trying to hide this fact by restructuring the loan accounts. They are asking RBI to change the definition for NPAs. Unfortunately RBI and Banks are not supplying correct picture on NPA even against RTI. Apex Chamber of Commerce & Industry (Punjab) tried its level best to extract this information under RTI but fail to get the true picture. The manufacturing sector is already dwindling despite government’s endeavour to improve it from 15% of GDP to 25% by the year 2025 by evolving a new policy. MSME sector in Punjab is suffering on scarcity and higher wages of labour and the high cost of credit. Thanks to NREGA the cost of labour has gone up by more than 30% and there is an acute shortage of labour affecting the productions. The only alternative with the industry under this scenario is to go in for upgradation of technology. Unfortunately the exhorbitant cost of credit is hindering the effort. There is credit link subsidy for technological upgradations. Unfortunately that subsidy amount take such a long time for disbursement that the real purpose is lost.
The miserable condition of manufacturing sector is that big companies are shifting their portion pertaining to exports to China. Bajaj Auto has already shifted the export portion of its 100 cc bike to China for their exports to African countries. Moreover, automobile companies are outsourcing components from China for exports from India. Hyundai Motor has already shifted its production of i-20 car to Turkey. Now TVS is planning to shift its export portion to China. As per Bajaj Auto the difference in price of the bike manufactured in China is 50% cheaper compared to Indian operations. The cost escalation is due to higher transactional cost, higher capital cost and higher labour cost. Punjab’s MSME sector heavily depends upon major automobile companies for supplying components. As a result Punjab’s MSME sector will suffer very adversely. Exports directly account for approximately 15% of aggregate manufacturing output. So with the shifting export operations to China our manufacturing sector will be hurt badly. External demand is critical in accelerating the growth momentum in manufacturing. During the period 2003-2007 global output growth averaged an unprecedented 5% and our exports also boomed. Now the situation is negatively critical due to circumstances in Europe and U.S.A.
Relative disadvantage of manufacturing in India is accentuating. This can be gauged from an index “Revealed Comparative Advantage” (RCA). With values below one it is the relative disadvantage. RBI’s annual report August 2010 reveals that RCA in our manufacturing has fallen below one by the year 2008.
Exports are sensitive to exchange rates China is keeping its exchange rate very low despite hue and cry against it. This helps boost export and that is why our automobile companies are taking their exports to China.
Due to ever increasing fiscal deficit government borrowings are likely to increase. This will further put pressure on inflation expectations. This can be further accentuated by number of social security schemes like foods security etc.
