Diminishing pricing power of India Inc prompts a pause

Companies unhappy, say RBI should have reduced rates for the sake of growth.

In the review of monetary policy, the Reserve Bank of India (RBI) minced no words when it said the pricing power of companies was evidently declining. The statement marks a shift from its earlier stance, when the central bank said pricing power had not declined, despite moderation in demand.

With macro-economic conditions only worsening, RBI had no option but to make this admission. According to corporate honchos, its decision to press the pause button was partly linked to the inability of companies to maneuver in tough economic conditions.

“Definitely, pricing power has taken a hit, thanks to the general inflation,” said Harsh Mariwala, chairman & managing director, Marico Ltd. “Companies are simply scared to take up prices, lest it add to inflationary woes.”

At a time when demand has been slowing, companies have had no option but to go slow when it comes to taking up price rises. For instance, in the fast-moving consumer goods (FMCG) sector, most companies have taken price rises of just about seven-eight per cent in the second quarter, when commodity inflation was much higher.

In the automobile sector, companies have been cautious about price rises, lest it impact growth, which is already slowing, said Rajeev Kapoor, president & chief executive officer, Fiat India. This year, the automobile sector grew about 12 per cent during April-October, compared with 30 per cent in the same period last year.

The fast-moving consumer goods (FMCG) sector, on the other hand, is beginning to see signs of a slowdown, especially in rural areas, which have been significant contributors to growth. According to analysts, the rate of growth of rural sales for most companies fell to 10 per cent from 15 per cent.

In a situation like this, does it make sense to raise prices? The answer is clearly no.

Companies are now expecting RBI would reverse its anti-inflationary stance by slashing rates. “We need growth,” says Venugopal Dhoot, chairman & managing director, Videocon Industries. “This is possible when the CRR and key policy rates are slashed.” Kishore Biyani, group chief executive, Future Group, says, “I was expecting a rate cut. That would have helped.” R C Bhargava, chairman, Maruti Suzuki, says, “The pause by RBI is certainly better than an increase of rates. There were expectations of a downward trend of rates from here, but that did not happen.”

J C Sharma, managing director, Sobha Developers, says, “Growth moderation is an issue. This has to be addressed.”

The index of industrial production numbers for October showed industrial output contracted by 5.1 per cent, led by a 25.5 per cent fall in capital goods. Manufacturing and mining declined six per cent and 7.2 per cent, respectively.

By cutting key policy rates, companies hope the momentum would be back. “Look around you. Where is the investment happening?” asks B K Goenka, chairman, Welspun Group. “Companies have been scaling back on account of the harsh conditions. A rate cut would have helped build momentum. That is important.”

Capital expansion fell from 30 per cent in 2008-09, and 15.5 per cent in 2009-10 to 13.8 per cent in 2010-11.

With RBI hinting at a possible rate cut, some remain hopeful. Says Subhrakant Panda, managing director, Indian Metals & Ferro Alloys Ltd, “It’s a great relief that RBI has recognised that the high interest rate regime is hurting the economy, and put a break on rate hikes. We hope interest rates would come down, and liquidity in the banking system improves, so that companies would be able to borrow at lower rates. We also expect the government to take policy measures in the coming months to improve sagging business sentiment in the country by accelerating investments in the infrastructure sector.”

“We expect to see reductions of interest rates soon. It could boost the markets, get FII (foreign institutional investor) flows back, based on better business environment. This would strengthen the rupee — something we very much need today,” says V Vaidyanathan, vice-chairman and managing director, Future Capital Holdings.

S Ramesh, chief financial officer, Lupin Limited, says, “RBI’s move to keep monetary policy rates unchanged during the current review does augur well for the economy and the industry, as it sends out a clear signal that the bank is looking to tackle the slowdown in growth momentum, though the cost of funds has not been lowered. This would remain the case until inflation is reigned in completely.”