Brace for costlier goods going ahead; manufacturers avoid price hikes despite high costs, but not for long

Manufacturers in India have avoided increasing prices even amid high input cost inflation but consumers must brace for price hike in small steps.

Manufacturers in India have avoided increasing prices even amid high input cost inflation but consumers must brace for price hike in small steps. (File Photo: Reuters)

Manufacturers in India have avoided increasing prices even amid rising costs, but consumers must brace for small increments going forward. “The vast majority of firms… decided to keep their selling prices unchanged”, despite input cost inflation being at the highest in seven-and-a-half years in December, Pollyanna De Lima, Economics Associate Director at IHS Markit, said in a note this week. However, manufacturers may increase prices in small steps now. “With limited pricing power, manufacturers can only afford to take price increases in baby steps,” Teresa John, Lead Economist, Nirmal Bang Institutional Equities, told Financial Express Online.

Moving inventory, keeping sales up

Firms did not raise prices despite high input costs “in order to boost sales, with overall charges up only marginally in December,” IHS Markit note said. The cost of holding inventory may have weighed on manufacturers’ decision to keep selling without raising prices. Manufacturers make a decision by weighing-in on factor costs, i.e. rent, wages, interest and profit, NR Bhanumurthy, Vice-Chancellor, Ambedkar School of Economics University, said. “There may be more cost of holding stock compared to passing on benefits to consumers. This depends on the cost of production. Cost is just not just cost of production, cost is also in terms of holding on to the stock,” Bhanumurthy told Financial Express Online.

Manufacturers may have feared sharp decline in volumes, in view of limited pricing power, if selling prices were to be raised, Teresa John added. “Demand remains fickle as incomes and savings of a large section of the population have been impacted by subsequent waves of coronavirus,” she said.

Higher cost burden on manufacturers

Manufacturers’ business confidence strengthened in December, according to the IHS Markit’s PMI for December, but sentiment was again dampened by concerns over supply-chain disruptions, new omicron variants and inflationary pressures. WPI inflation, a measure of wholesale inflation, stood at a double-digit rate of 14.23% in November. Indian manufacturers reported a monthly increase in overall cost burdens, the IHS Markit report noted. Firms will continue to face margin pressure in the near term, with rising input costs, and small price increases, Teresa John said.

Demand revival to help expand manufacturing

The Indian manufacturing industry expanded in December even though the index fell in comparison to the preceding month, according to the report from IHS Markit. PMI for November stood at 55.5, falling from PMI of 57.6 in November. A reading above 50 indicates expansion – higher the number, faster the expansion. Outlook for manufacturing looks largely positive with the manufacturers observing a further increase in new orders during December leading them to carry on with their restocking efforts.

“If there is revival in demand, manufacturers will be willing to expand,” NR Bhanumurthy said, commenting on the outlook for manufacturing this year. “There are two demands – external and domestic. External demand appears to be very very robust and that seems to be doing well particularly for the manufacturing goods. Domestic demand is a matter of concern, for which we will have to wait and see this week whether we go for partial lockdowns or prolonged lockdowns. Our assessment is we might not see the kind of lockdowns we saw during the second wave and if that happens, even domestic demand should also return,” he added.

Recovery momentum

“In our view the recovery will continue, but momentum will moderate after the sharp jump seen post the second wave. Supply bottlenecks may persist for longer with new variants emerging. However, while new coronavirus variants pose a risk, we expect the severity of restrictions/lockdowns and the virus to wane as vaccination advances globally and the virus turns endemic,” Teresa John said.

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