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Govindraj Ethiraj: Industry must cut prices for growth


Govindraj Ethiraj  |  Mumbai 

It was who said the other day that would have to and not, in effect, place that burden on banks to do so by offering lower interest rates to consumers.

He has a way of putting things in perspective. Will the current stimulus package be enough, I asked him within the hour of it being announced on Sunday. “It will never be enough,” he said, meaning that demands would always stay ahead of supply and people would always ask for more than they got and never be happy with what they get.

Then I was listening to dwell on that eternal question: “Why are banks not lending ?” Well, banks, he explained, though in not necessarily the same words, are also businesses and run like businesses. So if businesses are wary of striking forward-looking deals, so are banks. It just so happens that most of us are on the receiving end, either as individuals or enterprises. It’s another story that banks also take deposits and are supposed to be fulfilling a larger role in economic growth and development. But whichever way you look at it, at this point, you have no choice but to trust the bank more than it trusts you.

Funding for growth is not going to come in a hurry. It is a to the extent that everyone is sitting on cash. That does not mean, as most have concluded, that there is no cash, either with the banks or some firms. The Reserve Bank on its part has prodded enough — the last move being the reduction of reverse repo rates forcing banks to take their funds elsewhere — but the problem is not so much Mint Street any more.

The problem is more fundamental. I am not sure all companies have firmly recognized that survival and growth (in that order) will best be realized if there is (at least) more revenue and thus, potentially greater profits. For that to happen, for most firms, more products must be sold and services peddled. This is a a challenge in the current environment but, I would argue, mostly at current price points.

Look around you (as a consumer) and see how many falling price points you can count, apart from fuel prices, of course. Real estate, largely no. Cars and two wheelers, barely. Consumer electronics, somewhat, but this is one industry where prices are falling all the time in any case. Consumer products, such as clothing, soaps, shampoos, toothpastes..not yet. And yet input costs for all these products are down. Sure, there is a lag effect but it’s about time it started showing, unless all producers are only locked into 360-day contracts with their raw material suppliers.

The realtors continue to highlight high interest rates as the real problem in the economy. The stimulus package of Sunday said concessional interest rates might be in the offing for houses worth than Rs 20 lakh. The realtors acknowledged this but immediately grumbled that they wanted similar interest rates for higher slabs as well, going upto, say Rs 50 lakh, particularly for cities. Amazing.

The real estate industry, to my mind, continues to not just carry all the ills of an over-heated, inflated economy but also the past arrogance that property prices must somehow be immune to all the usual economic forces that govern demand and supply. A fact well-enforced by the industry’s continued demands for lower interest rates and increased credit.

The first response to any slowdown is to cut costs. Depending on the business or enterprise, that might range from moderate to sharp. Most Indian firms are in this phase currently. What if demand still does not pick up ? Well, you cut prices. Particularly so because Indians are value-conscious buyers and they will flock back as they always have.

I agree that slashing prices is not the most strategic thing to do. But then, not all companies are selling pricing-defined, luxury products. Bulgari CEO Francesco Trapani told the New York Times last week that “this is not a business where you reduce prices to sell more. This is totally wrong.”

I reckon it’s okay for him to say so but our realtors, for instance, are not exactly selling Bulgari time pieces. Particularly when the same real estate sold for between a third and a fourth of its current price just four years ago. And in contrast, luxury product prices have not risen 300 to 400 per cent in the same period.

Unfortunately, and I do say unfortunately, the government has blinked first here. A 4 per cent across-the-board excise cut is very good news as a government gesture to stimulate demand. I have serious doubts though on whether industry will pass on all the benefits for a reasonable period of time. On the other hand, to take a left-of-centre view, why should the tax payer subsidise companies who want to protect their profit margins?

A slowing economy needs stimulus packages to bring back growth on the track. It is my belief that while the government has to do its bit in areas like infrastructure, hard and soft, the private sector is yet to do enough this time around. The good news is that some sectors are already waking up to reality. Car companies had begun announcing cut-price deals last week, even before the 4 per cent cut. Indeed, this is the best time to wait for the best deals.

First Published: Tue, December 09 2008. 00:00 IST