Corporates mull hike in prices

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With the inflation hovering at 7.33% for the week ending April 12 and showing no signs of cooling down, interest-sensitive sectors like real estate, FMCG, automobiles and white goods are gradually feeling the heat and companies have started passing on the burden of the rising input costs to consumers. Apart from the increase in price of products, companies are reducing quantities in their packaging and are devising innovative measures to retain consumers. These are aimed at protecting their margins.

Says V Ramachandran, director, Sales & Marketing, LG Electronics India, “The prices of steel, copper and some petroleum derivatives have increased significantly in the last couple of months and as a result the costs of durables have gone up by 3-5%. This is affecting our margins. We have not increased the price of our products, but if costs increase further we will have to hike prices in due course of time.” He adds that the company had in fact increased the prices of some durables by 2-3% in December last year.

Economists feel that the current trend in inflation is broad-based and is driven by rising demand for agriculture, metal and fuel products and the spurt is clearly a case of supply shortages of agricultural commodities, steel and cement. Most experts agree that the current spiralling inflation is not a case where a lot of money is chasing too few goods, but a genuine case of supply shortages. “Present inflation is due to the mismatch in demand and supply of commodities at the global level,” says Subir Gokarn, chief economist, S&P, Asia Pacific.

In fact, globally the price of steel has increased by about 40% in the past one year on account of the rising demand for the metal in counties like China. The demand for the metal has gone up by three times in the last two years because of a sudden spurt in the construction activities. In India, steel companies after increasing the price of the metal in the past have now promised not to announce any increase in the prices of their products for a couple of months. This was after the prime minister hinted at cartelisation of the Indian steel companies.

Steel is the main raw ingredient for many manufacturers and any increase in costs can translate into higher prices for many companies. S Ranganathan, head of research at LKP Shares, explains that steel has seen a lot of interference on the pricing front. “This would impact profitability of steel companies because the input prices for steel companies have been increasing. And the differential between global steel prices and domestic prices is not helping the Indian industry.”

While there is no correlation between inflation and growth, India has always been an inflation sensitive country. Inflation in India, which is referred by the wholesale price index (WPI), had remained at around 4% for over six months since September 2007, but started rising in early 2008. For the week ended March 30, 2008, inflation reached a three-year-high of 7.41% and it came down to 7.14% for the week ended April 5, 2008. But it is still substantially above RBI’s target of 5%.

Despite the inflation rate still above the comfort level of the RBI, experts feel that moderate inflation in the economy can fuel growth in some sectors and keep the economy from getting into a stagflation phase. A stage when the economy is not growing but prices are rising rapidly.

An important characteristic of the current spurt in WPI figures is that it is widespread. The price index of manufactured goods jumped by 7.12%, primary articles by 8.89% and power and fuel rose by 6.65%. Primary articles have emerged as the largest driving factor for inflation over the past few weeks. Economists feel that current high inflation figure is still suppressed, as the burden of rising oil prices globally is not yet passed on to consumers in the country. Globally, price of oil has gone up to an all time high of $115 a barrel.

Bimal Jalan, former governor of Reserve Bank of India, says there is no defined range for countries on the correlation between inflation and economic growth. “The current rate of inflation is higher than the RBI’s target and the spike is due to a supply side problem in the country,” he says. In the 1970s India had 8% inflation, but GDP growth was only 3.5%. In the 1980s and 1990s, though GDP growth was 5%, inflation was around 9%. Inflation dipped to 4% couple of years ago while GDP grew to 8%.

Ranganathan of LKP Shares feels that the rise in the prices of oil and primary commodities is a global issue emanating from the supply side. “This rise is unlikely to ease in the short term and corporates have been trying hard to reduce the damage arising from the spiralling input cost pressures caused by rising commodity prices,” he says. He further adds that industries like auto components, capital goods and electrical segments have been struggling to pass on the cost increases to their clients.