Q2 to be worse than Q1 due to delayed reforms: Adi Godrej

The general mood in the economy the past few months has been somber. High interest rates and lack of government policy action has led to a low investment appetite and poor business sentiment.

According to the CII Business Confidence Index, this sentiment may not change for July-September 2012. The confidence index fell by 3.7 points to 51.3, after rising to 55 in April-June 2012 from 52.9 in the previous quarter. According to Adi Godrej, president of the CII and chairman of the Godrej Group, this fall indicates the low business sentiment that has been prevailing for the last few quarters in the country, mainly due to the lack of action from the government. And therefore, he believes the second quarter is likely to be worse than the first. “If action comes, then the economy will react positively and will pickup. However, if action is delayed, we can see even a lowering of economic growth in the country,” he said. He believes that the Reserve Bank of India should balance growth and inflation, because high interest rates and the non-availability of credit is impacting investment demand. “By keeping the rates high, the rupee has depreciated and the impact of the rupee depreciation on inflation is much worse than the benefit that might be created by having high interest rate,” he explained. Godrej further adds that political parties must now single handedly concentrate of economic growth. Below is an edited transcript of his interview with Shereen Bhan. Q: While the overall business confidence is actually down by 3.7 points, we have actually seen companies say that they expect the outlook to improve in Q2, both in terms of new orders, overall sales, as well as capacity utilisation. The industry seems to be suggesting that the Q2 is going to look better than the Q1. How do you explain that? A: Well that is the general impression of the participants in the survey. However, my personal view is that we could see a worse Q2 than Q1, because the expected reform announcements have got delayed. While Mr. Chidambaram gave an excellent statement a week ago which emphasized that the government would take the reform programme forward on several fronts, we don’t see much action. If action comes, then the economy will react positively and will pickup. However, if action is delayed, we can see even a lowering of economic growth in the country. Q: An overwhelming majority of the respondents surveyed saw the availability of credit decline as a big challenge, and they also expect inflation to be in the range of 7-8% in the current year. In that scenario, do you really expect the Reserve Bank to go soft on interest rates, which is what industry continues to demand? A: I don’t want to speak on what I expect the Reserve Bank to do. I would like to speak about what the Reserve Bank should do in the interest of the economy. The high interest rates and non-availability of credit, especially to small and medium industries, is very seriously affecting industrial production and growth. It is affecting investment and it is affecting the purchase of items, especially like residential flats, automobiles etc. So I think it is having a negative effect on economic growth. The Reserve Bank should balance the inflationary situation with the growth situation, and I do hope that there will be an easing of monetary policy. Q: Isn’t industry going to have to live with these high interest rates given the fact that the government at this point in time is not acting, and the RBI is waiting for the government to act? A: No I disagree with the RBI evaluation. I feel what has happened is by keeping the rates high, by keeping growth rates low, is that the rupee has depreciated and the impact of the rupee depreciation on inflation is much worse than the benefit that might be created by having high interest rate. So to my mind, lower interest rates will help inflation too because then the rupee will start appreciating and that will bring inflation down. Q: One of the things the survey talks about is how raw material costs, electricity fuel and wage inflation is all going to be impact bottom-line for India Inc. It has impacted bottom-line in the April to June quarter, and it is expected to remain at least at the same level, perhaps even get worse? A: Yes I think profit growth in Indian industry has been negatively affected and that will continue. The only solution is reform, together with RBI action which is growth-oriented. I think all political parties and all constituents in India must single-mindedly go for growth. Growth is essential. Even the other agenda which political parties wish to bring about, which the government wishes to bring about, the social agenda and other parts of the agenda, will not be possible to do if growth suffers as badly as it has.