Economic Highlights

New Delhi, 2 May 2022

Price Jigsaw

GROWTH A MIRAGE

By Shivaji Sarkar

High or as some call it hyperinflation, i.e.  rapid, excessive, and out-of-control general price increases, has become a serious issue with Prime Minister Narendra Modi talking to the States for bringing down the fuel prices, supposedly a key reason for the economic trouble.

Soaring corporate profiteering is another reason for the rising prices. Top 20 companies continue to have 70 per cent profits, as per Mercilius Investment Managers, and higher product prices in a supposedly subdued market. The Unilever, Suzuki Motor and JSW Steel all are in the game of raising prices.

The problem looks graver as earlier the Reserve Bank Monetary Policy Committee (MPC) noted that inflation has become a larger issue than growth with 6.95 per cent retail and 14.5 per cent wholesale index spurting. It has raised bills of government transportation, other expenses and Finance Ministry looking for additional support for the budget. Another intriguing issue is the faster rise of wholesale prices than the retail. A few years back the trend was a low WPI rise followed by higher CPI surge. The consumer prices in actuality are rising in double digits.

The RBI wonders how it should increase interest rates to match the inflationary trend. If it raises the deposit rates, lending rates too would move upward. A myth that the country may not find the borrowing costs affordable prevents it. The corporate are transferring minor additional costs to the consumers to keep their profits high in a distraught market. Most companies are raising prices in response to the global supply squeeze in the wake of Russia-Ukraine war. It needs a probe.

Despite efforts by the government except Gujarat and Karnataka not many States are known to have given relief in their taxes on petroleum products. Apparently this is becoming a political issue with the opposition joining the spat and the Finance Ministry announcing that Rs 78,704 crore of the States’ shares of cess is yet to be transferred. The Central government levies excise/cess on petrol of Rs.32.90/litre which includes basic excise duty of Rs 1.40, road & infrastructure development cess of Rs18, agriculture and infrastructure development cess of Rs 2.50 and special additional excise duty of Rs11. There are State duties in addition to it.

This is despite the Brent crude falling to $ 104 a barrel. For the past about two years, the benefits of unprecedented low crude prices were not passed on to the consumers. Fuel prices have risen by 31 per cent in eight years. Even petrol pumps supposed to be benefitting from higher commissions as fuel prices rise, are paying almost double the cost for tankers. In addition, the rising toll taxes are making goods even more expensive. Tolls also affect inter-region and localised trading.

The country sees an opportunity in the Ukraine situation of globally selling food grains at a higher price. While this may ensure higher remuneration to farmers, there is a flip side. It could cause domestic prices to soar. Prime Minister Modi recently said the government was approaching World Trade Organisation (WTO) for facilitating sales of Indian food grains in the world market. The WTO still has not come out with its terms.

The Ukraine situation has created a void as the largest suppliers are unable to meet the world demand. Ukraine exported about 1.7 million tonnes grains last month, according to consultant ProZerno. The most-recent volume still is only about half of March 2020. Markets are bracing for more upheavals as deliveries from Ukraine and Russia -- which together account for about a quarter of the world’s grains trade -- turn increasingly complicated and raise the spectre of food shortages.

A new market may gradually open up for India. Its ramifications are too early to study. India domestically has been overflowing with food grains. About 80 crore people are being given free food doles worth over Rs 2 lakh crore a year for past two years. While India is the second-largest wheat producer with a share of around 14.14 per cent of the world’s production in 2020, it accounted for less than 1 per cent of global wheat exports. The export potential could be large but with corporate domination, dream prices may elude farmers. The ramifications on the domestic market can cast shadow on the political spectrum.

The Black Sea region problems are to keep edible oil prices elevated and feed cost pressures could have a spillover impact on poultry, milk and dairy product prices, according to the RBI governor. Coal shortage, its higher prices and dependence on thermal power is increasing power cost per unit to Rs 6 to over Rs 10 or more. This would make use of electricity for trains, vehicles, farms and industry an expensive affair.

The inflation is eating volumes of large companies like Hindustan Unilever (HUL) claims CEO Sanjiv Mehta but he has no answer for its high 20 per cent operating margins, lower than earlier 24 per cent. The rising prices are ‘rationalising’ consumer spending. High raw material prices are now being compensated by raising product prices. As the company tries to transfer costs, consumers are being thrifty and settling for lower priced products.  Still it is having profits at Rs 2203 crore or 8.5 per cent. This testifies that high profiteering is the bane.

The consumer buys only what he needs of the FMCG. Many companies foresee a decline in high profits. Intelligent consumer spending is hitting large companies in urban and rural areas. Rising prices are hurting household consumption. Overall market trends can improve if profits are rationalised.

UN Conference for Trade and Development finds that still the ecommerce trade is growing. It however, does not consider this healthy. Total retail sales during pandemic increased to 19 per cent in 2020 up from 16 per cent in 2019. It has hurt the least developed countries as wells as small businesses. According to UNCTAD, global prices are creating problems all over. It has also led to over 8.81 lakh Indians leaving for greener pastures in the West.

The NDA II needs to follow NDA I of Atal Behari Vajpayee when low prices baffled observers. Vajpayee’s management skills need to be studied and used for solving a problem that is rocking the country. Modi needs to consult, set up a committee of experts and act tough to ensure the country goes back to a magic low inflationary phase for concerted growth.---INFA

(Copyright, India News & Feature Alliance)