Govt rattled by prices of manufactured goods

Despite the Reserve Bank and the government taking a series of policy measures in the recent past to contain surging inflation, the skyrocketing prices of certain manufactured products seem to have caught them off guard.

Finance Minister P Chidambaram had, at a Ficci event, sounded a warning saying that a section of industry was artificially pushing up product prices by holding back supply. However, industry does not agree with this view and attributes the increase in prices to enhanced demand.

An analysis by Business Standard shows that in Delhi, the prices of manufactured items like cement and basic metals, essential ingredients for the booming construction sector, have shot up by 40-100 per cent since March 2006.

In case of cement, the price has gone up by 40 per cent, from about Rs 150-160 (50 kg bag) in March 2006 to Rs 210-215 at present. This price rise is very significant for a common man buying or constructing a house.

Similarly, the price of nickel plate, a basic metal, has moved up by about 110 per cent from Rs 810 per kg to Rs 1,705 over the period. The price of zinc has gone up by about 197 per cent from Rs 80-90 per kg in March 2006 to Rs 238 at present.

Manufactured items that became costlier on annual basis for the week ended December 23 include tea and coffee (7 per cent), oil cakes (1.7 per cent) and edible oils (0.2 per cent). These are annual provisional figures on a week-to-week basis, but the price rise has been very sharp for products like iron and steel for certain periods in the last one year.

Chidambaram wants industry to refrain from taking a short-term view of the booming economy because it will harm them by forcing interest rates to rise. "It will work to the disadvantage of the economy," he had said.

Binani Zinc vice president Roshan K said the price of domestic price fluctuation is in tune with the movements at the London Metal Exchange and this applied to all non-ferrous metals. "Whatever quantity the industry produced in 2006 has almost been consumed. So, there is no question of holding back stocks," he said.

"There is a growing demand and the industry is working on expanding capacities to meet this demand," said E N Murthy, secretary general of Cement Manufacturers' Association (CMA). According to the CMA, between April and December 2006, 112.82 million tonnes of cement was produced and 112.25 million tonnes dispatched.

"There is no stock holding. The rising prices are in tune with demand," said Shailendra Chouksey, director of J K Lakshmi Cement.

In the wholesale price index (WPI) bucket, manufacturing index has the highest weight of 63.75 per cent, followed by primary articles (22.02 per cent) and fuel group (14.23 per cent).

The government wants to keep inflation below 4 per cent, and with the contribution of primary and fuel items to inflation declining of late, certain manufacturing items' prices need to be cut to stabilise prices. The wholesale-price based inflation is now hovering around 5.5 per cent, the upper limit of RBI's forecast of 5-5.5 per cent inflation in 2006-07. It fact, it had touched 5.61 per cent on October 21, 2006.

To check the rise in inflation, mainly due to supply constraints of primary articles and costlier fuel in the later part of 2006, the government had taken a slew of measures including import of wheat, pulses and sugar while reducing duty on palm group of oils and slashing petrol and diesel prices.

Supplementing this, the RBI has raised short-term interest rates four times by 0.25 per cent each and hiked the Cash Reserve Ratio by 0.5 per cent to moderate credit growth and suck out excess liquidity from the system.

But containing manufacturing prices will be difficult, unless industries enhance supply and increase productivity of products for which prices have increased sharply.