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The Inflation Inferno

The rising inflation is spreading to all sectors; we take a look at the worst hit

Honey, when we got married, you measured 36-24-36. Now you're 42-42-42. There's more of you, but it's not really appealing.” Well, what has happened with the gentleman's wife and with the Indian rupee, or for that matter, with many other currencies worldwide, is what we call inflation. More of it doesn't necessarily means it is more valuable. All efforts to contain inflation are going in vain, as every typical household in a Metro struggles to keep their daily-need bills within limits. Truly Life in a Metro... is not that good.


Inflation is a form of taxation that has been imposed without legislation and is something that not only individuals, but even sectors are finding difficult to bear with. Almost every sector under the sun is getting hit because of the reactive measures taken by the government to control inflation. But there are a few sectors that have been hit left, right and centre and have suffered the most. Here's a look to these sectors...


Automobiles: The sector gets deflated

Plagued by high interest rates and dampening local consumer demand, after seven straight years of growth, the sales of Indian automobile industry declined by 4.7 per cent to 96.48 lakh units in 2007-08 against 1.01 crore units in the previous financial year. The industry was largely impacted by the steep decline in two-wheeler sales, which reduced by 7.92 per cent to 72.48 lakh units in FY08 against 78.72 lakh units in the previous year. Sales of two-wheelers, the entry-level vehicle for most people, are mostly dependent on bank loans, which in the rural pockets seem to have dried up as banks have grown wary of lending to a class that is feeling the pinch of the high cost of living, or inflation (see graph below). For the month of March as well, there has been a y-o-y 1.4 per cent decline in total two-wheeler sales.


Banking: When the channels went dry

Inflation targeting has been the prime mandate of the central bank and the Reserve Bank of India rolled out interest rates hikes one after the other, but has failed to gather moss. Instead, what has happened is the borrowing cost of banks has gone up making the life of borrowers miserable. Consequently, banks too have seen a slump in credit growth. Credit growth has slowed down significantly from 30.4 per cent on a year-to-year basis as on December 2006, to a low of 21.3 per cent on December 2007. The latest figure available with RBI also shows that the incremental growth in net bank credit for the year 2007-08 is lower at 23 per cent, as against 29 per cent in 2006-07. The worst hit is the nationalised bank category, which have been asked to roll back the hiked interest rates even as RBI continues with its contractionary monetary policy, thereby rubbing salt into their wounds (see chart above). With the hike in CRR, the chances of banking channels running dry are getting higher.


The Real Estate sector has been the worst hit because of rising interest rates and consequently restrained flow of credit to the sector. The RBI has raised repo rates nine times since October 2004 to 7.75 per cent, making it difficult to the banks to extend loans to this 'sensitive sector'. Credit to real estate by scheduled commercial banks expanded by 33.4 per cent at November-end 2007, compared to 77.7 per cent growth at November-end 2006.


The mood is of utmost pessimism as property prices are heading southwards. With stock markets at rock bottom, people are terribly low on liquidity. In many parts of India, prices have fallen by 20 per cent over the last year. Meanwhile all over India, builders are offering discounts to ginger up the sales: Free modular kitchen, free interiors, free car, stamp duty relief, a few hundreds off per sq ft. Not surprising since home sales have dropped across the major cities. In the face of this price correction, builders are offering sweeteners.


“Generally speaking, real estate prices in the metro have stabilised. While, in some cases the prices have stabilised, like in Delhi, in some cases the prices have dropped, like Mumbai.... I am speaking about commercial space that's because Mumbai doesn't have that much supply as compared to that of Delhi. As far as residential is concerned, cities such as Hyderabad, Chennai and Kolkata are expected to see a 5-15 per cent increase in prices in the residential segment because of the low or moderate levels of prices in the region. Retail rentals in South Mumbai, Mumbai's suburbs, Delhi and Gurgaon are expected to see up to a 15 per cent decline as retailers find it difficult to operate profitably because of the very high prices," says Ambar Maheshwari, Director Investment Advisory DTZ - global real estate adviser.


Profiteering comes to an end

Apart from the sectors mentioned above, as the government gets into the fire fighting mode and beats around the bush, probably every sector is getting affected. The present, as well as the near future for consumer durable is tense, at least IIP data tells you that. The average figure for April-February 2008 stood at 374.9, as against 378.8, a decline of 1 per cent. Besides, bank lending to the sector has also declined substantially, from a y-o-y negative growth of -4.4 per cent as on November 2007, as against 11.2 per cent positive growth exactly as year ago. Furthermore, sectors such as steel and cement, the so called 'profiteers' are also finding the situation too hot to handle.