High Credit Cost Will Impede Industrial Growth: Assocham

The economy is showing signs of slowing down in the early months of the current fiscal. But it should be possible to maintain overall GDP growth at last year's level if supported by better performances in the agriculture and services sector, says the chamber in its mid-year review of Indian economy.

The GDP is expected to be pegged at 6.5 to 7 per cent this year against 7 per cent last year.

The agriculture and the services sectors are expected to show a marginal growth to 3.3-3.5 per cent and 7.5 to 8 per cent respectively against 2.4 per cent and 7 per cent last year, it says.

 

The chamber has cautioned that the fiscal deficit, targetted at 5 per cent of GDP this year, will be exceeded in the absence of serious efforts to contain government expenditure and raise public sector savings.

On the infrastructure front, the chamber says the outlook does not appear to be favourable in areas like power, petroleum and fertilisers.

Stating that the high oil pool deficit indirectly affected the profitability of oil companies, the paper adds that increased reliance on imports of petroleum will continue during the short-term.

Regarding power, the chamber says the demand supply situation is expected to worsen with the deficit as high as 14.7 per cent for base load and 29 per cent for peak load.

The government's initiatives to attract private investment in the infrastructure sector has not succeeded so far and the record is dismal in terms of actual implementation of projects, it says. Privatisation of this sector should entail a total change in approach with emphasis on transparent policy guidelines for investment, establishment of proper legal and institutional structures and development of markets for long-term finance.

Following healthy mobilisation of deposits and sluggish demand for credit by the corporate sector, the liquidity crunch has eased in the first quarter of this year, the Assocham paper says.

However, the excess liquidity was perceived to be a temporary phenomenon and commercial banks preferred to park their funds in short term securities for meeting SLR requirements.

Also, the decline in short-term interest rates has not yet translated into lower cost of medium and long-term funds for financial institutions and banks, and this hinders the bringing down of interest rates on a sustained basis, the study says.

The chamber has noted that double digit inflation is a distinct possibility in the coming months as the direct effect of petro-prices increase is estimated at 0.9 to 1.2 per cent. But the cost push effect is expected to be more worrisome at 4 to 5 per cent, the paper says.

The inflation based on consumer price index (CPI) continued between 9-10 per cent and if the increase in fuel and transport cost is included it could rise by 2 to 2.5 percentage points.

Exports in the first four months indicate a slowdown to 11.5 per cent, which is well below the 28 per cent increase during the same period in 1995-96.

While export of agriculture products continued to grow, the performance of minerals and manufactured goods was dismal, the study says.

imports have also decelerated with growth averaging 6 per cent in April-July 1996 compared to 38 per cent in the corresponding months of 1995.

Though the trade deficit during the period at $1.1 billion was 28 per cent lower than the corresponding level last year, the deficit is expected to widen as the total imports regain momentum, the paper says.