The rupee has started its reversal a bit quicker than I thought. The next instalment to this story will be a shocking deceleration of industrial growth and an acceleration of inflation, probably peaking at over 12% around Diwali. In the past, periods of high industrial growth have cratered because of overcapacity driven price cuts and low profitability. This time growth will crater because of no capacity. Unless the government moves fast to hike the price of oil and up the price of electricity, while making both available to those who can pay, industry across the country will grind to a halt. Already electricity boards including the formerly almighty GEB are refusing new connections.
If we really do not get our hands on either electricity or diesel and if the country faces de facto rationing the industrial production will go for a toss.. A low tech business that does not produce for a day a week loses less than 1/7th of its turnover given the inefficiencies of most small Indian companies. A day off for most modern factories built under the liberal regime of the last 5 years loses far more than one day as getting a 24/7 factory back to work takes a day in itself; add up losses from daily power 'tripping' and you could very well have production losses of over 20% of capacity.
Large companies can afford to pay a lot more for electricity, making up for the cost on higher productivity, and that is what they in essence do by running on diesel for 1 or 2 days a week.
Many companies can survive, though with bleating customers, even on INR 70/litre diesel, but will the oil marketing companies have access to the cash needed to lose 100MM USD a day (or more) in order to continue to supply? Or will the credit crunch make banks warier than in the past about lending to sick puppies, whether or not they are government guaranteed? You can be sure that what comes in will be doled out in a 'people friendly' manner so there will be a nice black market created.
The chance of the world's shortest Sardar and his Milanese Sardarni seeing out the term is zilch because waiting will merely subject them to further beatings at the hands of the public and messrs Wretchedury and co. A resignation around August means that campaigning at least will be in generally pleasant weather - absolutely necessary for the gerontocracy who rule us.
Though making the b______ face our music in June in UP would show them what they have bestowed on the country.
Till then expect to see diesel shortages, power cuts and general hell for smaller manufacturers, which will take a nice bite out of GDP.
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