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Tuesday, 16 July 2013 00:41
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That's the story from the latest inflation numbers

It speaks volumes for the near-complete collapse in economic growth that, despite the rupee falling by as much as 10% over the dollar since January and the government consistently raising prices of diesel by 45 paise each month, that the latest wholesale price inflation (WPI) was still below 5% for June. Core inflation, that strips away items like food and fuel prices from the index, was down to a mere 2.15%, the lowest in the last 42 months. Indeed, had it not been for food articles which continued to remain expensive, largely due to government mismanagement of the food economy—matters will get worse as preparations for the Food Security Bill begin in earnest—the drop in inflation would have been even sharper. Despite the regular increase in diesel prices and the collapse in the rupee, what’s interesting is that the fuel index continued to fall in June—from around 12% levels a year ago, monthly inflation in fuels fell to 7.12% in June. Manufacturing inflation fell to 2.75%, a level last seen 44 months ago.

 

This is now RBI’s big dilemma. Shrinking imports and falling IIP—it fell 1.6% in May—suggest there is little economic momentum left. Obviously, RBI needs to cut interest rates to stimulate demand as well as to ease the interest burden which is very high for small and medium enterprises. Cutting interest rates is the obvious solution but, lower rates too much, and FII investment in debt could fall even further, putting more pressure on the rupee. In which case, the action now moves to the finance ministry and its ability to persuade state-owned banks to take a hit on margins and pass on interest rate cuts to consumers. The government, needless to say, needs to clear projects faster, especially in cases where these involve precious FDI coming in. While government press releases regularly claim to be clearing several thousands of crore rupees of stuck projects, the fact that these haven’t translated into action on the ground suggests more needs to be done before banks start lending to them.

 
 

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