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Inflation, Indian IT & more... - Views on News from Equitymaster
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  • Aug 18, 2008

    Inflation, Indian IT & more...

    Inflation more inflated!
    "Indians are getting stronger. Twenty years ago it took two people to carry Rs 100 worth of groceries. Today, a 5 year old can do it." This is an Indianised version of Henny Youngman's quote on the Americans. No other quote on inflation can be more practical than this. And it is very true in context of the inflationary situation that India is facing currently, which has seen consistently higher prices for items like food, clothing and shelter (roti, kapda aur makaan). If this were not enough, the inflation number continues to rise showing no real signs of stabilising! As was announced late last week, India's inflation (as measured by the wholesale price index or WPI) climbed to its 16-year high of 12.44% for the week ended August 2. This rise in inflation was on the back of soaring prices of commodities like pulses, fruits, spices and aviation turbine fuel. In fact, the fuel price inflation stands at 17.99% (-2.1% same lime last year). Economists expect inflation to rise further following the government's approval of the Sixth Pay Commission's recommendation of an average 21% salary increase for around 5 m government/PSU employees.

    All this gives the Reserve Bank of India (RBI) little choice but to raise interest rates further, the timing of which is still uncertain. The RBI has already raised interest rates three times over the past three months, with the last rate hike happening in July when the central bank raised its benchmark rate (repo rate - rate at which the RBI lends to banks) by 0.5% to a seven-year high of 9%.

    Rising inflation has the seeds of stalling economic growth. But even this depends on various factors like the level of capacity utilisation of the industrial sector in the country, employment levels and competition. If manufacturers are operating in an economy where supply exceeds demand, the ability to increase prices of goods when input costs are rising is limited. Take the case of the Indian auto industry. Even though steel prices have rocketed in the last two years, the prices of cars have not followed suit to that extent (this is a global phenomenon as well).

    Indian IT's European concerns
    As if currency instability and slowdown in US technology spending and subsequent delayed spending on offshoring services was not enough, Indian IT companies are facing growth issues in the European markets as well. These companies, which have for so long talked about Europe as being the 'next big thing' in technology offshoring, have witnessed steady fluctuation in incremental revenues from this region over the past four quarters. However, the year on year growth in business from the European region remains strong when compared to growth in business from the US and other geographies. Managements of top Indian technology companies have, in fact, talked about their European operations as adding a 'buffer' in times when discretionary tech spending from the is witnessing some slowdown.

    Windy times ahead
    The International Herald Tribune recently reported that wind power is gaining advocates in the US, the world's second biggest polluter after China. While only 1% of US electricity comes from wind, it is attracting so much support in that country that many in the industry believe it is poised for growth.

    The report goes on to state that 'last year, a record 3,100 turbines were installed across 34 US states, and another 2,000 turbines are now under construction from California to Massachusetts." In all, there are more than 25,000 turbines in operation in the US, set up with an investment of US$ 15 bn. Last week, the US Energy Department has indicated that, by 2030, wind power could provide 20% of US electricity, or 304 gigawatts (GW), up from the current set up of 16.8 GW (a compounded annual rise of 14% in wind power capacity).

    Indian wind power equipment suppliers like Suzlon Energy are already charting the path to opportunities in the global markets, including the US, Europe and China. The US is, in fact, one of the company's largest markets and it had set up a manufacturing capacity there in 2006. However, while the opportunity for the company is huge, these come with a set of constraints like that of key equipment supply and logistics. Then, the company had recently faced breakage issues with some of its wind turbines in the US, for which it had to set aside Rs 1 bn as provisions.



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