Whether or not the decision of real estate developers to cut prices by 5% to 10% was influenced by the finance minister?s call, it allows another examination of the minister?s premise. During the last two years, real estate prices in Delhi and other Tier I cities rose by as much as 60%. Some of this was froth and the froth was sustainable because banks were lending up to 90% of the total mortgage, commercial property costs. After interest rate hardening and reduction in banks? proportion of financing, real estate prices softened. Price cuts may make potential borrowers interested, although of course mortgage rates above 10% are business killers in the main. Unless lending rates come down, a marginal cut in prices is unlikelyto boost demand signifcantly enough.
In auto, another sector in slump, prices were increased by 10% to 30% when steel prices jumped. In easy finance times this could be passed on. But with auto loan rates increasing to 22% and steel prices crashing, can?t automakers think of price cuts as a way to boost demand?
For the aviation sector, the debate about lower ticket rates is fierce. Air traffic has continued to decline since June this year with October experiencing a steep 12% decline in traffic. Aviation companies say they don?t like this but they dislike their cost structure even more. But jet fuel prices have been cut down three times in the last four months, whereas the fuel surcharge imposed by domestic airlines remains at Rs 3,100 per sector. The surcharge was just Rs 1,350 last November.
The price of aviation turbine fuel has now come down to Rs 39,767 per kilolitre from Rs 41,417 per kilolitre last November. Remember, fuel surcharge still remains the main component of an air ticket after the basic fare and explains some 45% to 60% of the total cost of an air ticket. With oil prices still falling, is a price cut that impossible?