Cut. That seems to be the buzzword ? from job cuts to price cuts it reads as the easiest answer to get out of the current situation that we are in. Just when Finance Minister?s announcement on price cut was not met with open arms from Indian Inc experts too echoed similar sentiments.
As Manoj Vohra, India Director, Research, Economist Intelligence Unit reasons, ?The call for price cuts reflects the government?s growing concern over waning consumer demand and confidence. It also shows that the government has limited tools ? fiscal or monetary ? available to spur demand. Inflation is still high (limiting aggressive monetary intervention) and the government is already staring at serious fiscal pressures (limiting any significant fiscal stimulus).?
For experts feel FM?s call for price cut is like passing the buck and not by any means a resolution to the problem. Professor C P Chandrasekhar, Centre for Economic Studies and Planning, Jawaharlal Nehru University points out, ?What I am hoping for is a fiscal stimuli, which is not limited to just addressing infrastructure needs of highways and dams, but covering fundamental aspects of generating mass consumption demand.?
The mood is clear. It is the government that has to lead from the front and not just come up with short-term solutions. As Abdul Majeed, Partner, PWC puts it, cutting interests rates, injecting liquidity, investing in infrastructure and R&D and cutting excise duty should be the top priority of the government at present. Inclusive growth will hold the key in these times of uncertainty. Short-term measures can create confidence and enhance demand for the time being only, but we have to focus on long-term measures.
About the auto sector Majeed confirms that the small and the mid car segment is already struggling with margins. It has to deal with constant issues of environment, emission norms and fuel cost and shortage. So one has to be very realistic in terms of looking at price cuts and what sectors can go in for one.
As Vohra corroborates, ?Not all sectors can afford to go for substantial price cuts. The aviation sector, which suffered a lot when oil prices were record high, has thin net profit margins. Real estate, on the other hand, has healthy profit margins,close to 50% for some companies.?
Though analysts opine that price cut should be left for the market to decide for and demand and supply be the deciders. Logical, if demand is shrinking, prices will automatically soften. If industry does not respond to the situation and cut price, it will not be able to sell at the same price, as there will be no takers. As analyst Ajay Shah confirms, ?In a business cycle downturn, a key source of difficulty is price rigidity. The best example is real estate. At present, sellers haven?t cut prices and the trading volume has dropped to zero. This is the worst of all worlds. It would be far better if sellers were flexible and cut prices so that business sparked back to life.?
Similarly, the best thing to get when macroeconomics becomes more daunting is a depreciated currency and lower stock prices. If the government artificially props up either the stock market or the currency market, this gives an incentive for people to sell off assets and take money out of the country. As he adds, ?In short, I?m sympathetic to the point being made that people should see reality and cut prices. I don?t see why the government should be saying this, though. Decisions about price should be made by individual CEO?s.?
At the governments end, the call for price cut spells like a half-hearted effort ? an eyewash of sorts. As Daljit Kohli, Research Head, Emkay Global Financial Service affirms, ?It?s more of a political gimmick. Industry is not in isolation, but in a competitive world and it responds accordingly; so it is not looking at instructions from anyone on when to cut prices.? s