Just when everyone is abuzz with clamours of how to save India from the after-effects of the global financial crisis, the recently concluded India Economic Summit was no different. While all seemed to be agreeing on the need to raise demand and ensure the slowing economy regains its growth momentum, there were differences between the government and the industry on the ways to spur sales. Making matters complex were voices of protests within the two groups.
As Finance Minister P Chidambaram mooted cut in prices to increase purchase in the market, there were hardly any takers for the idea from the industry. Individual corporate houses instead exhorted the government to cut excise duties and facilitate lower interest rates to effect reduction in prices.
The government reasoned that prices of goods and services should be reduced to increase demand and thereby industrial growth, which slowed to 4.9% in the first six months of this fiscal against 9.5% a year ago. ?Hotels must cut tariffs, airlines must cut prices, real estate must cut rates of apartments and homes they sell, carmakers and two-wheeler makers must cut prices,? Chidambaram said, adding that the government would take measures to stimulate the domestic economy, which is sailing against the ripple effects of global economic downturn. Hotels and airlines in the US have started reducing prices from last week.
However, appeals from industry bodies for lowering interest rates was rejected by the FM on the grounds that it would require the inflation to come down substantially lower. The wholesale price index, the most-widely used measure of inflation, was at 8.9% during the 52 weeks ending November 8. RBI has a tolerance level of 7% for inflation this fiscal.
Trying to gain favour with the industry, Chidambaram comforted that public sector banks had assured him that they would extend cheaper credit to corporate India and the government would consider cuts in excise duty for sectors ?where it may stimulate demand?.
Though industrial houses rejected the suggestion to reduce prices on the ground that it would reduce their already low margins. ?The two-wheeler industry is not like other industries where the margins are 30-35%. This industry has a margin of about 4-5% only, and in the near future we do not see any price cuts,? country?s second largest two-wheeler maker Bajaj Auto?s Chairman Rahul Bajaj said. ?Minimum wages are increasing, fuel prices have increased and electricity costs have also increased. So, how do we bring down the prices of our products?? questioned Hero Honda Motors Chairman B M L Munjal.
Bajaj and Munjal also pointed out that the real problem was not the price but high interest rates for auto and consumer goods. Real estate developer DLF?s Chairman KP Singh reasoned, ?There are no takers for housing. Ideally, the interest rate should be around 7%.? Bajaj added that due to the high interest rates and low demand, real economy is in a bad shape and would take longer than the financial sector to come back to the growth path.
Their call also found support from inside the government. Minister of State for Industry Ashwani Kumar confirmed that prices should come down but a company should not cut prices at the cost of its competitiveness and survival. He also took up the cudgels ?To ensure the survival of the industry.? On the other hand, industry lobbies CII and FICCI favoured slashing the prices. CII president and ICICI Bank Managing Director & Chief Executive KV Kamath sounded confident that ?Most product categories? would see new prices, FICCI Chief Rajeev Chandrasekhar said that the present challenging economic situation calls for ?Revised business models of lower margin and higher volume.?
As the problem emanated from the liquidity crunch caused by weakening of confidence in the banking system and exodus of foreign capital from the country?s financial system after the fall of major banks in the US and other developed countries, banks started holding on to money and stopped sanctioning fresh loans to industries. Even if they did, it was on high interest rates. This affected capital investment plans of companies and they cut down production and raised prices to meet the high input cost. As one can notice that off-late even a fall in prices of inputs like steel could not encourage companies to cut prices and they absorbed reduction in costs.
As the industry is also feeling the heat from falling exports, with demand from US and Europe coming down as buyers in those regions are consuming lower amount of goods and services, feasibility of a price cut remains contested.
Consider this: India?s exports have fallen for the first time in five years. More than a 20% decrease in the value of rupee against the US dollar also could not work in favour of exporting community due to slim order books. Also, ?Many exporters had taken positions when the rupee was appreciating and have not got any benefit out of currency depreciation,? said a senior official of Forbes & Company Ltd, which supplies tools for automobile and shipping industries.
Clearly, in such a scenario, the manufacturers are trying to focus on the returns they can draw from the domestic market, and price therefore emerges as a key determinant. How India Inc decides to battle this double-edged sword of falling exports and increasing calls for price cuts, is a question that only time will answer.
K P Singh Chairman, DLF
There are no takers for housing. Ideally, the interest rate should be around 7%. Government should facilitate housing through legislation to bring down prices.
B M L Munjal Chairman, Hero Honda Motors
Minimum wages are increasing, fuel prices have increased and electricity costs have also increased.So, how do we bring down the prices of our products?
Rahul Bajaj Chairman, Bajaj auto
The two-wheeler industry unlike other industries does not have margins of 30-35%. It has a margin of about 4-5% only and in the near future we do not see any price cuts.