A few months after having asked the cement and steel industry to hold prices, the government today said car and two-wheeler makers, airlines, hotels and real estate developers must cut prices in order to boost consumer demand and help revive the Indian economy.
“Hotels must cut tariffs; airlines must cut prices; real estate developers must cut rates of apartments and homes they sell; car makers and two-wheeler makers must cut prices,” Finance Minister P Chidambaram told a well-attended gathering of industry bosses at the concluding day of the India Economic Summit of the World Economic Forum.
Simultaneously, Chidambaram said he is open to examining suggestions to cut the excise duty, which currently stands at 14 per cent.
The finance minister reminded the assembled gathering, including leading lights of Indian industry and several foreign CEOs, that the classic response to a demand slowdown is to cut prices. “It is much better to retain market share than to just look at profit and loss. All my friends here are used to 9 per cent economic growth and 30 per cent profit margins. They must learn to live with 9-10 per cent margins,” Chidambaram said.
Predictably, the response from Indian industry was mixed.
Rajya Sabha member and Bajaj Auto Chairman Rahul Bajaj said the finance minister’s suggestion to India Inc to cut prices can only be implemented if interest rates fall. “Industry does not have a magic wand to cut prices. What needs to be done is to make lending rates by banks cheaper. Banks are not lending to customers,” he said, adding that the two-wheeler industry has a margin of about 4-5 per cent only. “In the near future we do not see any price cuts.”
On his part, ICICI Bank CEO and CII President KV Kamath said price cuts would happen, but said interest rates needed to come down. “Loan rates are more affordable at 10 per cent. Today they stand at 13-13.5 per cent. The lending cycle needs to get kick-started. Car loan rates need to drop by 3-4 per cent. Overall interest rates need to drop 2-3 per cent.”
“Minimum wages are increasing, fuel prices have increased and electricity prices have also gone up. How do we bring down the prices of our products?” said Brij Mohan Lall Munjal, chairman, Hero Honda Motors, India’s largest two-wheeler company.
KP Singh, chairman, chairman, DLF Ltd, the country’s largest real estate developer, said there are no takers for housing at current interest rates. “The ideal rate of interest for a housing loan should be 7 per cent,” he said.
The finance minister asked the industry to take a broader view of things and not worry unduly on the economic growth front, as the government would take steps to stimulate the economy. “We will take steps to stimulate the domestic economy to compensate for the downside caused by the downturn in the world economy,” he said.
Chidambaram said India was likely to end the year with a satisfactory growth rate, despite the downturn in advanced economies, although he declined to put an exact number on the expected rate. “Next year, we will bounce back to a much better growth rate,” he said, adding that the growth could reach 9 per cent by the second half of fiscal 2009-10.
