It would be naive to believe that the market was not expecting a rise in the prices of commodities after the budget. Unlike earlier budgets, where people used to delay purchases, most user industries had purchased large amount of stocks before the budget announcement. This would partly explain the drop in volume sales just one month after the budget announcement. But that is only one part of the story. Sceptics claim that the drop in commodity prices in July after announcing a hike in June is because the slowdown in industry has led to lower demand. In an effort to push sales, companies have now reverted to the lower pre-budget prices.

Steel

Prevailing steel prices in the market currently are at the same level as that prevailing Feburary 1998. Market prices of HR coil are ruling at around Rs 16000 per tonne down by Rs 1000 per tonne from the June prices. The sad part is that inspite a 7 per cent depreciation of the rupee, four per cent import duty levied on imports, theprice hike announced by the steel majors were only in the region of 2-4 percent. With low demand of steel products especailly from the automobile and white goods sector, coupled with the lack of progress in infrastructure projects, the companies have no option but to raise discounts or extend credit period beyond the 90 days norm. Today most of the steel players are offering credit of 120- 150 days. Telco, Ashok Leyland, M&M, Escorts and other players by themselves do not consume a hugh amount of steel. But once we consider the ancillary and forging units, a drop of 10-40 percent of production has a cascading effect on the entire steel industry. Orders for galvanised pipes have also dropped, resulting in lower steel consumption.

Synthetic fibres

The price of synthetic fibres and yarn have also fallen. The web page of Reliance which is a market indicator for prices of poysters and polymers shows that in one month after the budget, the PFY prices have dropped by Rs 1 to Rs 59 per kg and PSF hasdropped by Rs 4 to Rs 44 per Kg. The drop in polyester price is all the more significant as the approach of the festive season results in prices and orders being the highest in the second and third quarters of the year. One reason for the price fall could be drop in international prices of PSF and PFY by 10-15 percent from April 1998 onwards. Nevertheless, the budget provisions and subsequent depreciation had ensured protection to domestic industry of close to 12 percent. Further the user industry being fragmented in nature, they find it extremely difficult to import. Hence the price drop by local players suggest a demand compression rather than pure replication of the international trend. The hypothesis of demand compression can also be checked from the performance of the user industry. Inspite of the 25-30 percent drop in prices of polyster fibres/viscouse/nylon fibres , production has been showing a declining strength. The latest CMIE data shows that the inventory position has risen every month inspite ofproduction not increasing very much. Even in the polymers segment the price of PVC has fallen by Rs 2 per kg to touch a low of Rs 30 per kg which is approximately the same as price in May 1998. Again the user industry is fragmented and their lower offtake has resulted in price going down.Although the prices of polyester intermediates have remained the same and in case of MEG have slightly increased, this picture is distorted as we have a monoplistic industry for these products.

Non-ferrous metals

In non-ferrous metals, take the case of the copper industry, which is again supposed to be a one of the biggest beneficiary of the swadeshi budget. True to the budget announcement, in June prices touched a high of Rs 13350 per quintal in Mumbai market. Hindustan Copper has increased the prices by Rs 200 of its copper cathodes to Rs 10,500 per quintal, wire rods to Rs 11,200 per quintal and wire bars to 10,900 per quintal. Nevertheless prices in the first two weeks in July have been falling at the rate ofRs 25- Rs 50 per quintal per week. Traders expect this to continue for quite some time. This is against an international trend of firming up of copper prices. The reasons are similar. Demand from user industry have reduced. As per the statistics prepared by IEEMA there was general slowdown in electrical industry. Motors and Generators saw a decline of five percent of sales in 1997-98, while decline in sales of wires and cables was over six percent. This has further detoriated and hence the user industry was ill- equiped to absorb the price hike. Even the institutions, in their outlook for this year, do not expect demand to pick up. A look at their sanctions would show a phenomenal increase in the level on funds appropriated for working capital requirement compared to project and asset based loans. In fact the IDBI balance sheet shows that disbursement for short term/working capital loans increased from Rs 102 crores to Rs 1859.8 crores. Majority of the working capital increase has been to finance the lockedin money in inventory.Two things follow from the preceding micro-analysis. The first is that demand needs to be kickstarted. Since the private sector is not going to invest under conditions of excess capacity, the government needs to increase its investment spending. The second is that the current increase in the rate of inflation is entirely due to a shortage of agricultural products. In the manufacturing sector, price softness is the order of the day.

(with contributions from Manish Saxena)