The low-low land

 

The central bank should stay further policy action till clarity emerges on the economy

Riders swishing on pre-BS IV disposed of scooters and mobikes, buyers frenetically clicking on keyboards to fill their shopping carts with goods with slashed MRP, middle-income home owners pirouetting to outlets with cool-priced ACs and refrigerators, vacationers kicking heels to book low-fare flights. The Indian economic landscape is resplendent with light-footed consumers making the most of slim price tags before the music ends. Housing finance is at a six-year trough and along with the interest subvention is attracting buyers of the thin-margin affordable housing. Cement prices are flat as capacities outstrip incipient demand. Fossil fuel-based power is aplenty but most state electricity boards do not have funds. Solar power prices have plunged with more players rushing in for the tax breaks. FMCG companies have lost the pricing edge due to a crowded market place and finicky users. US clients of tech companies want the discounts offered during the slowdown to be a norm rather than an exception. Airlines are capping costs to keep their noses above water. If the carrot of regional connectivity is a boon or a bane will be known a few years down the line. Free introductory services by a newcomer have resulted in telecom data prices sliding.  Garment makers are catering to the low-end market. Streaming services and brisk sales of large-sized Led screens going cheap have put pressure on multiplexes. Metal prices have softened as China’s growth engine slows. Even pizza makers are facing the brunt of diners’ resistance with digestible food grain and vegetable prices. 

Low inflation is the conclusion of circumstances: Global credit crunch since 2008 and good monsoon in 2016 after two years of drought. Surprisingly, prices have not spurted despite accelerating foreign investments due to a surging Wall Street. Some of the restraint displayed by producers might be voluntary. Slipping crude oil and metal prices have shaved off manufacturing input costs. Many others’ might not be. Tighter emission norms resulted in destocking of two-wheelers at throwaway prices. The specter of higher GST rate prompted retailers of white goods to liquidate their inventory in a hurry. A few might have refrained from taking price hikes on concerns of buyers’ backlash: makers of dairy products. The markets, however, do not appear unduly perturbed by the turn of events. Equities seem to betting on recovery in demand to protect the margins going ahead. Another outcome that is anticipated is consolidation. As such, even valuations of small companies are soaring in the hope of these entities growing their market or being eventually taken over. The debt segment is in a buoyant mood in the belief that coupons have scope to come down by 50 basis points to one percentage point before the festive season starts. Credit also has to be given to DeMo for sucking out excessive liquidity and nudging a significant portion of the population to divert part of their unreported holdings to tax liability. The exercise was timed perfectly: post normal monsoon and festive season that had seen the informal economy making good gains. The next step in the value chain to tame inflation is GST. The regime is going to pull down prices of essential items from the present level. Savings are to be passed on to the consumers. As such, retail inflation is unlikely to climb up. Some of the surplus might even go to higher tax segments such as restaurants and consumer durables that might be reluctant to increase the tab to maintain the cash flow.

The danger is that a low-cost economy propels savings into unproductive assets such as gold and real estate in search of higher yields and as a hedge. The central bank is not in an enviable position. The crucial issue is if a rate cut at this delicate stage will hasten the economy’s passage into deflation or boost consumption. Will Corporate India embark on risk-taking, unsure of the returns? Many distressed assets on the block are not finding buyers. Massive redevelopment plans in Mumbai are stuck for developers. Higher support prices to farmers and waiver of their loans mean increased borrowings by state governments with depleted treasury, putting pressure on liquidity. A thriving economy needs benign inflation. The present real rate of interest of around 4% is moderate. Hasty action either way can trip the economy. Reduction in lending rates will boost equities and bonds into bubble territory. Status quo will create volatility. Instead, the monetary authority should announce a freeze of six months to a year till the next policy action. By then clarity will emerge on the direction of the economy. The move will instill confidence in businesses to utilize their capacities as those waiting for prices to decline further might be willing to open their wallets.

Mohan Sule