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India faces the dilemma of maintaining growth

business Updated: Apr 04, 2008 23:48 IST

Hemmed in by export bans, rising input costs, increased borrowing rates, and a hard rap on the knuckles by the government, Indian industry faces the dilemma of maintaining growth in a period of shrinking margins.

India Inc feels that the government’s call for industry to hold the price line is only a short-term solution and coaxing it to regulated price model was not a sustainable remedy.

On Tuesday, the government sent out a strong warning to steel companies asking them to bring down prices by 10 to 20 per cent within a month failing which the industry would have to face tough measures.

The steel industry responded has by reducing prices by Rs 2,000 per tonne on Thursday. Industry representatives said prices have been reduced in “national interest”, but it might not be a long-term solution.

“To what extent would the government use its persuasive power to influence the iron ore exporters, the Railway board, coal producers, and fuel suppliers to hold the price line? The industry is in a very piquant situation. The input cost including prices of iron ore have gone up while the selling prices are more or less capped by the government resulting in margin erosion,” said Mosa Raza, president of Indian Steel Alliance.

“We are entering into a danger zone where expansion plans are likely to be jeopardized,” said Raza.

The prices of cement have also gone up by 20 per cent since February this year and companies have attributed the increase to higher value added tax on bulk cement, higher demand and rising fuel prices as the reason behind the increase in prices.

“Due to sharp increase in the input cost, certain core sector is expected to witness erosion in the profit margin, which will be visible in the first and second quarter,” said Bharat Banka CEO of AB Birla Group private equity firm.

“The cost of production has gone up due to a variety of factors including high interest rates and input costs,” a senior executive of cement company said.

“Industry will be able to hold the price line so long as it is commercially feasible. Some may be able to hold it longer than others, some may not be able to do it at all,” said president of Federation of Indian Chambers of Commerce and Industry (Ficci) Rajeev Chandrashekhar.