India Inflation Persisting as Deficient Roads Conspire With Power Shortage
Truck driver Sujan Singh should be delivering cars to Mumbai from Maruti Suzuki India Ltd. (MSIL)’s plant near New Delhi. Instead, he’s sitting at a roadside cafe by one of India’s busiest highways, waiting for the traffic to ease.
“I’ll start again in the evening and travel through the night as you face huge congestion during the daytime,” he said, enjoying the warmth of a burning pile of trash in the New Delhi winter air. “Most of the highways are just single lanes and the roads are so uneven and bad that that it causes accidents.”
India’s failure to upgrade its 4.2 million kilometers (2.6 million miles) of roads, close a 10 percent power deficit and ease congestion at ports is hobbling the central bank’s efforts to beat inflation. Even after raising interest rates by a record 375 basis points in 1 1/2 years, wholesale prices have risen more than 9 percent for 12 straight months. The bank says supply bottlenecks that push up costs must be tackled.
The country of 1.2 billion people is paying for two decades of neglect. While China 20 years ago went on a multitrillion dollar spending spree for roads, railways, ports and power stations, its South Asian neighbor concentrated on services. Now, as China reins in prices and expands industry inland to restrain wages, India’s near record-low rupee and price gains are damping consumer spending and choking off company earnings.
“India has allowed a large number of cars without creating enough roads; a large number of industries without enough power to run them,” said Sunil Sikka, president of Havells India Ltd., the nation’s second-largest electrical components maker by value. “It’s like trying to wear shoes without socks -- very, very irritating and difficult.”
Cars and Soap
Sikka said Havells has to pay higher packaging costs to protect lamps and switchgears from India’s bumpy roads, where average speeds are 20 kilometers per hour (12 mph). Businesses from Maruti to soap and food maker Hindustan Unilever Ltd. (HUVR) also suffer, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd. in New Delhi.
“All companies where there is movement of goods and services and distribution are getting hit,” said Thunuguntla. “It adds to their costs and affects productivity.”
Maruti, Godrej Consumer Products Ltd., and Hero MotoCorp Ltd., maker of almost half the motorcycles sold in India, are among hundreds of manufacturers that make their own electricity.
“From the beginning we took the decision to use our own power as the power supplied by the government wasn’t reliable,” said R.C. Bhargava, chairman of Maruti, a unit of Hamamatsu, Japan-based Suzuki Motor Corp., which has made vehicles in India since 1983. “Doing business in India is much costlier.”
The transport delays and power shortages make shares of Indian companies less valuable than those of rivals abroad, said Sadanand Shetty, a Mumbai-based senior fund manager at Taurus Asset Management Co., which manages about $1.3 billion.
“They have to pay a huge cost,” said Shetty. “Indian company shares trade at a discount to competitors overseas.”
Maruti’s estimated price-to-earnings ratio for this fiscal year, a measure of how expensive a stock is within an industry, is 14, compared with 24 for Japan’s Toyota Motor Corp., according to data compiled by Bloomberg. Maruti shares fell as much as 3.4 percent in Mumbai today, more than the decline of as much as 1.9 percent in the benchmark Bombay Stock Exchange Sensitive Index. Havells dropped as much as 6.6 percent.
The additional expenses in India add to inflation, limiting the country’s tools to cope with a worsening global economic outlook. The rupee, down 15 percent so far this year, is heading for its second-worst year against the dollar since 1991, when Prime Minister Manmohan Singh, then finance chief, began a shift toward free-market policies.
India’s inflation is the highest among the so-called BRIC nations, which include Brazil, Russia and China, with its benchmark gauge rising 9.1 percent in November from a year before. By comparison, China’s rate eased to a 14-month low of 4.2 percent, giving its policy makers more room to support growth as Europe’s debt crisis curbs exports. Russia’s pace was 6.8 percent and Brazil’s 6.6 percent.
The prime minister said in a Dec. 14 interview in New Delhi that “if the international situation doesn’t stand in our way, we will bring down inflation,” predicting it will come down to “no more than 5 or 6 percent.” While international commodity prices have pushed up costs in India, record food production should help ease pressures, he said.
The International Monetary Fund sees India’s consumer-price inflation still outpacing China’s rate by almost 2 percentage points by 2015.
“Even if the global economic slowdown provides some relief from inflation in the short term, India will continue to be at a disadvantage until it fixes its problems with power, roads and other infrastructure,” said Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt.
China in 2009 spent an estimated $539 billion on infrastructure, amounting to 10.8 percent of its gross domestic product, compared with $99 billion, or 7.5 percent of GDP, for India, according to Morgan Stanley.
“Look at China, they first put in place all the necessary roads, electricity, power,” said Ravi Sud, chief financial officer of Hero MotoCorp. “That’s the reason they now have faster growth, with manageable levels of inflation. We, on the other hand, are still struggling to take off.”
Singh has pledged to tackle the problem with policies that call for $1 trillion in infrastructure spending between 2012 and 2017.
“India has huge plans,” said Rajat Nag, managing director-general of the Asian Development Bank. “It’s a question of implementing them. It needs to accelerate the pace of approvals, take care of environmental clearances and issues related to land acquisition. Bottlenecks are a huge drag on the economy.”
Targets to lay more highways and generate more electricity have been repeatedly missed. In the year through March 2011, the National Highways Authority of India built 1,780 kilometers of motorways, about 30 percent less than its target. In the same period, the nation added 9,585 megawatts of power, 34 percent less than forecast.
“The delays have been due to problems in land acquisition, environmental clearances and in some cases poor performance of contractors,” said Manoj Singh, an adviser at the nation’s Planning Commission in New Delhi. “It would be unrealistic to think of matching the U.S. or China in terms of infrastructure. It would take many decades.”
Fitch Ratings changed its outlook for Indian infrastructure projects to negative for 2012, from stable this year, in a report released Dec. 15, citing risks to the credit quality of power projects, airports and toll roads.
India may still reap some reward from the development of industries that don’t rely so heavily on transport networks. Its aggregate share in global commercial services trade will exceed China’s in the next five to six years, driven by information technology, which accounts for about 60 percent of India’s services exports, according to Morgan Stanley.
The country may also get some respite from inflation as a global economic slowdown curbs demand for goods. Exports rose 10.8 percent in October from a year earlier, the least in two years, the Commerce Ministry said Dec. 1. Factory output that month shrank 5.1 percent from a year earlier, the first drop since June 2009, the Central Statistical Office said.
That’s pushed the yield on India’s 10-year government bond close to the level of the one-year note, showing that some investors are betting growth in the country will slow. The Reserve Bank of India in October cut its economic growth forecast to 7.6 percent for the year through March, from 8 percent previously. RBI Governor Duvvuri Subbarao has said his comfort zone for inflation is 4 percent to 6 percent.
Prime Minister Singh’s efforts to restrain prices took a blow earlier this month when the government reversed a decision to allow overseas retailers like Wal-Mart Stores Inc. to open supermarkets, after failing to get support from political allies.
Singh and Commerce Minister Anand Sharma have said allowing the investment would create 10 million jobs, and help rein in inflation by reducing the 40 percent of fruit and vegetables that rot before they get to market.
The prime minister vowed in last week’s interview to revive the plan after regional elections next year.
India aims to award projects for 7,300 kilometers of new roads and expressways this fiscal year, and spend 550 billion rupees ($10.4 billion) widening existing thoroughfares, according to the highways authority.
With 3.7 million new vehicles hitting India’s streets last year, that’s little consolation for truck driver Singh.
“I’ve been driving for 20 years and every year the traffic gets worse,” he said, as other drivers sat at the cafe eating dal and chapattis and waiting for the jam to disperse.
While India has the second-largest road and rail networks in the world, even on highways -- which account for 2 percent of all roads -- average speeds are 35 kph, compared with 80 kph in the U.S., according to JC Bamford Excavators Ltd.
JC Bamford, which sells its yellow diggers in 150 countries, says it takes at least nine days to move equipment 2,900 kilometers from New Delhi to Trivandrum in South India, said Vipin Sondhi, the local unit’s chief executive officer. The equivalent journey in the U.S. would take four days.
Once exporters finally get their goods to port, there are more delays. The average time taken by ships to unload and load at Indian ports is nearly 96 hours, almost 10 times longer than in Hong Kong, a government estimate showed last year.
“Roads are like the arteries,” said Rupa Rege Nitsure, a Mumbai-based economist at the state-owned Bank of Baroda. “If your arteries are clogged, your life is at risk.”
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