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Cost blot on growth story

In the strange world of market economies, good news can sometimes lead to bad news, because traders and policymakers follow their own logic, reports Gaurav Choudhury.

business Updated: Feb 12, 2010 20:55 IST
Gaurav Choudhury

In the strange world of market economies, good news can sometimes lead to bad news, because traders and policymakers follow their own logic.

Industrial output has grown by 16.8 per cent year-on-year in December triggering hopes that the worst might be over for the Indian economy, but the rising spectre of prices could play party pooper.

On the one hand, the recovery could mean the government is emboldened to withdraw the stimulus measures set in motion more than a year ago when the worst global economic recession in seven decades hit the economy. On the other hand, manufacturing companies could jack up product prices to protect their profit margins in the face of surging demand.

A slew of recent data releases have confirmed signs of rising domestic demand in India.

Consumer durable production grew by a healthy 46 per cent in December on the back of 38 per cent growth in the previous month, perhaps mirroring higher purchases of goods such as televisions and refrigerators. Automobile sales have clocked robust sales and have grown by over 25 per cent between April and January (2009-10).

Growing consumer appetite may make the decision to raise prices easier for companies.

Durables makers have already indicated they would raise prices of televisions and white goods to offset higher prices of intermediates such as steel, copper and other metals.

“We are trying our best to absorb the effects of price hikes but if the trend continues then the company will be forced to raise prices by one to five per on certain products,” MD of LG India Moon Bum Shin told Hindustan Times.

While food price inflation is hovering around 18 per cent, the consumer price index representing a wider basket of goods is also showing signs of reaching worrisome levels. Consumer price inflation is hovering at around 14 per cent.

“Anecdotal evidence suggests inflationary pressures continue to build and we expect a sharp increase manufactured prices in the coming months,” said Sonal Varma, economist with brokerage and research firm Nomura Financial Advisory.

The Reserve Bank of India (RBI) has also expressed concern about growth pushing prices.

The government needs to plug a big fiscal deficit it has incurred in trying to generate demand to prop up growth over the past year. Now it might want its money back by restoring some taxes.

A 2-percentage point hike in excise duties, to bring the rate to 10 per cent, is on the cards. The government had cut the duty by 6 percentage points.

“The recovery is becoming stronger, and offers the scope to partially reverse tax cuts that was announced to cushion the downturn,” said Rajeev Malik of Macquarie Securities.

Companies have indicated they would not hesitate to raise prices.

“We are monitoring the prices as inflation and price hike of raw materials is definitely a concern,” said Ravinder Zutshi, deputy managing director of Samsung India. “We have not taken any decision to hike prices and will wait till the general budget.”