Within the last two weeks, cement and steel companies have begun to rework the prices of their products. As the virulence of the economic downturn eases for the Indian economy, more companies from different sectors will walk the same route.
That is a fairly natural phenomenon. As demand conditions adjust, companies will quite naturally rework their pricing strategies to derive the maximum advantage for their revenue, and so for their profitability. Of course, with respect to the cement sector there is an often fair suspicion that a cartel like syndrome emerges, but that is not the norm in other sectors.
Just as the economy lost its momentum in the third quarter of 2008-09 and producers were forced to cut back on prices and sometime later offer discounts to move their inventories, they will now scout for opportunities to make up for those blips. The opposite will also hold true for the services sector, where pricing pressures are holding good. Getting the correct price signals is very important, one can say the most crucial element, to figure out how fast we can as an economy, swim out of the current recession. If instead, industry captains and ministers play the familiar game of wresting advantages, then long after the rest of the major economies have shrugged off their recessions and gone about their task of rebuilding, we will still be figuring out ways with convoluted schemes for sectors that will just pile up jobs for the boys. Remember the revival package for the textile sector.
But as a new government takes over in New Delhi, there is a high possibility that earnest ministers will immediately ask for the prices to be rolled back. Those would be followed by threats of tax or other punitive measures. In 2008, finance minister P Chidambaram asked the cement industry to reduce prices and created a stand off that did little good to the economy. This is how the situations get messy.
The consumer loses both ways, if that happens. If the prices are rolled back, the companies will lobby hard for some sops that will pass under the radar. The sugar industry, for instance, has been able to keep in the rule book the law that says no mill will be set up within 15 km of each other in the sugar growing regions. In the fertiliser industry, especially for urea, the government control of prices, perpetuates a national shortage year after year and still stymies any chance of moving to a more balanced application of fertiliser in the fields.
The other alternative companies explore is differential pricing, till recently monopolised again by sugar but which has now spread to cement and could afflict steel too. And we are not talking about the petroleum sector here, at all.
The reason why the uproar over prices occurs is that the government of India runs a very tight ship on inflation. Even the slightest nudge from any sector sends prices spiralling. It has been six weeks since the wholesale price based inflation has slipped to near zero. Yet as so many commentaries have pointed out, the consumer price based indices have not dipped significantly. This is because the price mechanism in the economy is badly developed. As several columns in this space have pointed out, this is because of the reluctance of the government to carry through transport and distribution changes in the economy.
This means the underlying price pressures are extremely strong. This has very little to do with the fact that we have a large population with a latent demand. It takes place even in sectors where that is just not of any consequence. For instance the price of credit has not come down for industry despite the RBI slashing rates by 425 points in six months. The floor is set by the interest rate on small savings deposits?government run funds. This is something that will need to be sorted out if we are to quickly come out of the downturn. It, therefore, creates a very perverse set of incentives for the companies to stay on the right side of the government and for the latter to milk it to its advantage.
So if steel or cement prices soar, buyers too take similar evasive action. The common way of handling it is to approach the government to ask for prices to be cut down. The automobile industry did this in December last year. So basically the price mechanism degenerates into a competitive lobbying game by the sectors with the government.
But this need not occur. Parliament has already set up a Competition Commission of India, whose mandate is basically to check out if industry is resorting to cartel like behaviour. But, it will be a rare minister who will hand over the reins of the price mechanism to such a body.
?subhomoy.bhattacharjee@expressindia.com