As inflation in manufactured products has refused to decline substantially, unlike food articles’ prices, it has become a bit of a puzzle as to how manufacturers are passing on increased input prices to customers, despite low demand.
Leif Eskesen, chief economist at HSBC, which sponsors the widely tracked Purchasing Managers’ Index, said he did not believe demand in India is low at this point. “Demand remains sufficiently solid to allow companies to increase prices charged at an accelerated pace, to pass on still accelerating costs,” he said.
However, CARE Ratings’ chief economist, Madan Sabnavis, disagreed. “There is not much demand right now, which is impacting companies’ bottom lines, as they are absorbing high input costs, along with the other deterrent, market competition. GDP growth is down, industrial growth is slow and interest rates are high. The demand is not as robust as in 2010-11,” he told Business Standard.
Dun & Bradstreet’s senior economist, Arun Singh, said companies have capacity to absorb increasing input costs, but it is not infinite. “Companies have critical variable limits. When the minimum limit of holding costs is crossed, the cost of final product will go up,” he said.
CARE’s Sabnavis said if overall inflation came down, demand may rise.
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According to GDP data, private final consumption growth fell to 16.09 per cent in the second quarter of 2011-12 year-on-year, from 16.31 per cent in the first quarter, which was also a low economic growth period.
But, inflation in manufactured products did moderate for December, though not as much as food inflation. Manufactured products’ inflation declined 0.29 percentage points to stand at 7.41 per cent in December, against 7.5 percentage points in the case of food inflation.
YES Bank chief economist Shubhada Rao said the marginal easing in manufacturing inflation was due to the base effect. Last year, manufacturing inflation moved up from 5.02 per cent in November to 5.3 per cent in December.
Core inflation, the rate of price rise in manufactured products excluding processed food items, eased from 7.96 per cent in November to 7.72 per cent in December. “Core inflation moderated, but it continues to remain at an elevated level,” said Rao. In fact, October core inflation was revised up to 8.06 per cent from the 7.63 per cent estimated provisionally. On a month-on-month basis, core inflation rose 0.52 percentage points, marking the fourth consecutive month of significant gain.
“The import intensity of core inflation shows that significant price pressures have been noted in the import-heavy commodities of gold and gold ornaments, chemicals, aluminum wires and so on,” said Rao. But, Sabnavis says global commodity prices have been softening, but its impact on manufactured product inflation was not seen due to the rupee depreciation.
“Though international commodity prices have declined, rupee depreciation has blunted that effect,” he said.
As much as 55 per cent of edible oil is imported and the fall in the rupee against the dollar has dampened the impact of international price decline, he said, citing the example to buttress his arguments. Inflation in edible oils came down only a bit to 11.52 per cent in December.
Rating agency Crisil has said that as long as core inflation remained sticky, a sustained decline in overall inflation remains far from certain.
Dun & Bradstreet’s Singh said manufactured items’ inflation was expected to decline by March, as primary articles (those found in raw form, of which food inflation is a part) have a lag effect of nearly four to six months on processed products.
Primary articles’ inflation was down to 3.07 per cent in December from 8.53 per cent in November.