Says India, China must strike a balance between inflation control & growth; fears another slowdown.
In his first public criticism of the central bank’s sustained anti-inflationary stance, Tata Group Chairman Ratan Tata on Monday cautioned that “self-imposed fiscal prudence” to tackle inflation, mainly in India and China, could cause another global slowdown.
Addressing shareholders of Tata Motors in the Annual Report for 2010-11, Tata said while inflation was a lurking enemy of healthy growth and needs to be controlled, there was a need to strike a balance between controlling inflation and driving economic growth.
“What should be of concern to all is the creation of a situation where the pendulum swings too far in the opposite direction, causing another global slowdown — this time, not based on over-valued assets but on self-imposed fiscal prudence,” he said.
He said central banks in both India and China had initiated measures to slow down their economies to curb inflation. “The resulting high interest rates, tighter credit regimes and higher fuel costs will dampen consumer demand for a range of consumer products, including automobiles," Tata said in the report.
The Reserve Bank of India had stepped up policy rates seven times during the last financial year and once again in May, resulting in hardening of the repo rate by 225 basis points (bps) to 7.25 per cent and reverse repo rate 275 bps 6.75 per cent.
“The extent of an economic slowdown in Asia will depend on the severity of the anti-inflationary measures adopted. Automobile sales have already started to decline in India. There has also been a decline in automobile sales in China for the first time in two years", added Tata.
Tata Motors was one of the seven passenger vehicle-making companies in India whose first quarter sales stood less than sales posted in the same quarter of the last year, even as market leader Maruti Suzuki posted a marginally better, at three per cent.
On future plans for Jaguar and Land Rover, Tata said, "Assembly operations in India have commenced for the Land Rover Freelander. Assembly operations of other Land Rover products are also under consideration. To optimise synergistic strengths between JLR and Tata Motors in India, an examination is underway on a joint engine development programme which would have manufacturing facilities both in the UK and India."
JLR is aiming to downsize its engines and replace the large gasoline and diesel powered engine with smaller, equally powerful, frugal and fuel-efficient range of engine to be developed jointly with Tata Motors. These engines will also be used by Tata Motors, India’s biggest vehicle manufacturer.
The increase in input costs such as that of steel, rubber, petroleum products and precious metals will have an impact on profitability of Tata Motors stated the report.
JLR recently announced its partnership with Williams F1 to bring a production version of the concept vehicle Jaguar C-X75 showcased at the Paris Motor Show. The car, which is a hybrid super car was developed by Jaguar's Advanced Design team and the Jaguar Land Rover Technical Innovation Team. "While the company continues to pursue cost reduction initiatives, rises in commodity prices and other costs resulting from inflationary pressures, could impact the profitability to the extent that the same are not absorbed by the market through price increases and/or could have a negative impact on the demand. In addition, because of intense price competition and the high level of fixed costs, the company may not be able to adequately address changes in commodity prices even if they are foreseeable", stated Tata Motors in the report.
Further, The company provides post-retirement and pension benefits to its employees, some of which are defined benefit plans. The pension liabilities are generally funded and the pension plan assets are particularly significant.
Therefore, Tata Motors JLR unit switched to the new defined contribution pension plan from April last year.
"Lower return on pension fund assets, changes in market conditions, changes in interest rates, changes in inflation rates and adverse changes in other critical actuarial assumptions, may impact its pension liabilities and consequently increase funding requirements, which will adversely affect the company’s financial condition and results of operations", it cautioned.
