Cut prices, IBA chief tells industry

Joining the chorus for slashing prices to spur consumer demand, the Indian Banks’ Association (IBA) on Wednesday said manufacturing and services companies need to reduce prices of goods and services significantly.

“Some manufacturing units are cutting down production and are holding on to prices. But they do not have the power to cling on to inventory. It is important to drop prices significantly to rekindle demand,” said IBA Chairman T S Narayanasami, who also heads Bank of India.

Many manufacturing units have approached banks with requests for reduction in interest rates or for restructuring of loans, citing piling up of inventory. The companies have argued that with stocks rising, their cash flows have been affected and it is making it tougher for them to meet their debt commitments.

 

Narayanasami said banks have done their bit by reducing interest rates. “First, everybody was pointing to high interest rates on credit for the decline in consumer demand. Now, rates have come down considerably. Still, credit offtake has not improved significantly .... It is true to some extent that the industry has not done its bit. Both hands have to work (but) that is not really happening,” he added, while suggesting a 20-30 per cent price reduction for real estate and consumer durables.

Last week, Finance Minister P Chidambaram asked companies — especially sectors like automobiles, real estate, hotels and airlines — to lower prices and revive the economy, a suggestion that was dismissed by industry captains. On Saturday, a similar call by Civil Aviation Minister Praful Patel and his instructions to Air India have resulted in announcements of fare cuts by some of the airlines. Private airlines like Jet and Kingfisher have set a tax reduction on aviation turbine fuel as a pre-condition for fare cuts.

The auto manufacturers argued that high input and operational costs, a sluggish second quarter and disappointing festive season sales had dented their operating profits. Any reduction in vehicle prices was not possible at the moment, industry representatives said.

Car sales have grown 3.5 per cent during April-October, while two-wheeler sales were 6.6 per cent higher during the period. They have sought easier access to credit for buyers and lower interest rates to push demand.

A large number of real estate companies, which are saddled with debt, have approached banks for loan restructuring and are putting projects in the pipeline on hold. High real estate prices and interest rates had forced buyers to defer purchase.

Similarly, hotels are seeing a drop in occupancy rates due to the economic slowdown that has forced corporate executives to cut travel as part of an overall cost cutting drive. Some hotel projects, planned along with realtors have already been put on hold.