Credit Crisis- Will it Last?
Ajit Ranade, Group Chief Economist, Aditya Birla Group believes that the current credit crisis is a function of temporary shortage of Cash. The shortage of cash has been aggravated by:
1. FIIs fleeing the sensex;
2. The RBI’s unwillingness to inject liquidity by buying out MSS bonds;
3. The government of India delaying making cash payments for the first instalment of Pay Commission awards, and fertiliser bonds;
4. Government delaying the release of advance tax collections.
India’s Chief Economic Advisor, Arvind Virmani sees the global financial crisis as benefit to easing the inflationary trends. The three main commodities, edible oil, steel and refinery products were the main cause for these cost pressures. With the possibility of a global slowdown, the prices are moving southward, this would have a positive impact of the balance of trade. The negative of the financial crisis has reflected in an risk aversion to lending and utter loss of confidence. But the macro economic indicators of the Indian economy are good as reflected in the growth rate of exports at 36% (April-Aug), overall growth rate of around 8% and the reverse trend of commodity prices.
The high short-term rates is going to hurt working capital costs in the industry. This is credit taken from banks to tide over, until the customer pays. In times of downturn, firms try to instinctively delay payments to vendors, and collect quicker from customers. But clearly at the systemic level this is disastrous. The SME sector lacking deep pockets, suffers the worst, and a rise in working capital costs can wipe its profits. This sector contributes the bulk of industrial employment and exports, and hence needs liquidity support urgently. The Central Bank is keeping monetary conditions tight inorder to tame the inflationary trends. Given that commodity prices are collapsing worldwide, and even agricultural stocks are piling up, the Bank may not persist with this strategy.
