The politicians of the country understand very well that elections can be won or lost on onion prices. With only 83 million people in salaried occupations in a country of 1.4 billion, households don’t have much bargaining power on wages to cope with the high cost of living. The differential effect of prices on producers, especially on smaller operations hit by the pandemic with lower profit margins, is less appreciated.
The Wholesale Price Index, which tracks goods at factory gates, rose nearly 13% in January from a year earlier. The gauge posted double-digit growth for 10 straight months, even as the benchmark consumer price index, which includes services, recently hit the central bank’s tolerance range of 2% to 6% annual gains. The top is broken.
Nevertheless, the Reserve Bank of India is quite optimistic about future inflation and keeps the market guessing about whether interest rates will rise in a meaningful way this year. In doing so, the RBI is risking its credibility for a little extra growth. Is this trade-off even worth it if higher prices put smaller companies out of business?
Think of the 7% difference in the pace of wholesale versus consumer inflation as a cost squeeze. Not all manufacturers can deal with this pressure equally easily. In the September quarter, when the economy opened up after the second deadly wave of the pandemic, smaller makers of everyday consumer goods only achieved a 2% increase in selling prices compared to a year earlier. According to NielsenIQ, large firms took up 76 percent, and medium-sized firms accounted for the rest.
The data provider says input cost pressures have forced producers to raise prices, especially for food products and cooking mediums. “This has had a severe impact on small manufacturers,” NielsenIQ said in its report. Companies with sales of 1 billion rupees ($13 million) or less supply almost a fifth of India’s staples market. In the third quarter of 2021, there were 14% of them less than a year ago.
Some may have been bent due to pandemic-related disruption. Others are going out of business, as opposed to larger rivals that can absorb a portion of the growth. commodity costThe already increased finances of smaller companies are forcing them to try and pass the increases on to consumers. Many are not being successful. An industry association has warned that a third of India’s edible oil refining capacity could be shut down – and relocated to Indonesia or Malaysia – because it is cheaper to import refined oil.
Prices of edible oil, aluminium, tinplate, plastic, paper and glass are near their highest levels in a decade, while prices of coffee, sugar, wheat and milk are above their 10-year averages, according to Mumbai-based brokerage Prabhudas Lilladher. noted last week. Nestle India Ltd.’s December quarter earnings analysis. With product and packaging costs rising, the maker of Maggi, Nescafe and KitKat sacrificed 210 basis points of gross margin to increase revenue by 9% from a year ago. It squeezed employee costs and overheads to keep operating profit — the ratio of earnings before interest, taxes, depreciation and amortization of sales — intact.
Small firms do not have this type of staying power. Many of them have used government loan guarantees to access fresh loans to survive the pandemic. According to economists at State Bank of India, the backstop prevented $24 billion of loans to micro, small and medium enterprises from going bad, protecting the livelihoods of 15 million workers.
However, these businesses aren’t exactly out of the woods. When it comes to repayment of their loans, credit bureau TransUnion CIBIL estimates that 18% of borrowers were in poor shape in March 2021 when they took emergency loans.
Big companies are flexing their marketing muscles. The Indian arm of Unilever Plc achieved its highest market share in a decade during the December quarter. But as economically constrained small manufacturers lay off workers, the purchasing power of the population risks further eroding, hurting weak consumer demand, and making it harder for other vulnerable producers to survive.
Hence stagflation risk high in India. Price hikes in things such as clothing and footwear, health, transportation and communication are taking a structural turn – and are becoming more complicated. Two years after the pandemic, “the inflationary trend in these categories has increased rather than waning,” says Sunil Kumar Sinha, economist at India Ratings and Research Ltd.
RBI is insisting on one wire. Yes, the recovery of the domestic economy from Kovid-19 is still far from complete. According to Nomura Holdings Inc., production in service industries is down 24 percent compared to before the pandemic. But now it is the task of fiscal policy, which is being kept extremely lax for the third year in a row, to deal with the slowdown in demand.
The time for monetary misadventure is over, with Brent crude oil at $100 a barrel for the first time since 2014 and the US Federal Reserve launching a massive tightening campaign. Allowing domestic prices to get out of hand will not lead to India’s additional growth. It would be the exact opposite if inflation further bankrupts its small producers.
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