Sixth Pay Commission: Consumer durable sales will fall this festive season: Experts

Sixth Pay Commission: Consumer durable sales will fall this festive season: Experts

10 Oct, 2008

NEW DELHI: Sales of consumer durables this festive season will see a downward trend on account of a severe credit crunch and the stock market crash, experts and traders said here on Friday.

"Liquidity will certainly increase due to the CRR (cash reserve ratio) reduction, but the PLR (prime lending rate) has still not changed, which will deter people from taking loans from banks unless it is unavoidable," Delhi University Professor of Economics Shri Ram Khanna told reporters.

The Reserve Bank of India (RBI) Friday further cut CRR by 100 basis points, which means it will leave the banks with more money to lend in the market.

CRR is the amount of funds banks have to keep with RBI against their deposits. If the central bank decides to increase this amount, funds available with the banks come down, while if it is reduced - as was the case Friday - banks are left with more disposable money.

In India, sales of consumer durables such as refrigerators and air-conditioners increase during the festive season beginning end-September and early October.

However, following a severe liquidity crunch this year in the aftermath of a global meltdown and stock market crash, sales of these goods are likely to be hit hard.

Moreover, with the PLR remaining unchanged, people are not inclined to take loans from banks.

PLR is the benchmark rate at which banks lend money.

"People will not borrow from banks to buy refrigerators or AC when there is double digit interest on them," Khanna said.

Increasing instances of terrorist activities is also deterring consumers from shopping, he added.

Praveen Khandelwal, secretary general of Confederation of All India Traders (Cait), echoed the sentiment, saying: "The international economic scenario is a dampener on the festive season sales."

"Traders are incurring huge losses as consumers are not only facing financial strain but also security concerns that are deterring them from going shopping," he added.

According to D.K. Joshi, chief economist at credit rating agency Crisil, while the market is certain to be impacted, there are factors that could offset it also.

"The Sixth Pay Commission has pumped in money, which will increase purchasing power and raise demand," Joshi said.

However, the liquidity crunch is certainly a dampener on consumer durables sales especially when people make token purchases during Diwali, Joshi added.

The government needs to take extra measures to ensure extra liquidity in the market and make available soft loans to the traders to meet their production costs, Cait's Khandelwal said.

He said the markets till last year had seen sales rising 30-40 percent during the festive season that lasts till January-end to early February.

However, instead of witnessing any growth, trade is on a downswing with losses mounting, Khandelwal claimed.

"Though the Sixth Pay Commission has given the salaried class more liquid cash, it is only on paper till now. Unless people get the money in hand, sales will remain sluggish and traders will suffer losses," he added.

India's benchmark securities index crashed Friday by nearly 1,000 points within minutes of opening but recovered substantially after the central bank announced a cut in the CRR to inject an estimated Rs.400 billion.

In addition, RBI has reduced the CRR by 50 basis points Monday, which will likely inject about Rs.200 billion into the system.


Source: http://economictimes.indiatimes.com/