New Delhi/Mumbai: Indian manufacturers are running out of capacity to absorb rising input costs, with an increasing number passing it along to consumers in an economy already grappling with Asia’s third-fastest inflation and an uneven recovery.
Companies from the Indian units of Unilever Plc and Suzuki Motor Corp. to homegrown JSW Steel Ltd. are raising prices in response to the global supply squeeze made worse by the surge in energy costs following Russia’s invasion of Ukraine. Higher retail fuel prices are also threatening to hurt demand just as the economy returned to its first full-year of growth after the pandemic-induced 6.6% contraction in the fiscal year ended March 2021.
“Inflation remains unabated and is a cause of concern for the second year in a row,” said Ankush Jain, chief financial officer at Dabur India Ltd., one of the nation’s largest consumer-goods companies. As pressure on margins loom, Dabur plans to go for calibrated price increases, besides rolling out cost optimization measures to mitigate price pressures, he said.
Companies passing on costs will add to inflationary pressures, but the consumer price-targeting RBI has maintained that the current spike is supply driven and best dealt with by the government. Policy makers, who will meet this week to decide on interest rates, have signaled they may revise their 4.5% inflation forecast for fiscal 2023 but do little else to tighten settings for fear of hurting growth momentum.
“While not acknowledged by the central bank yet, there is telltale evidence of inflation likely being much higher,” said Kunal Kundu, an economist with Societe Generale GSC Pvt. That “can further imperil consumer confidence.”
Consumers are key to the country’s economic recovery, with private consumption accounting for some 60% of India’s gross domestic product. To foster demand, the central bank will likely keep borrowing costs lower for longer.
That will leave the RBI struggling to deliver on its primary job of keeping inflation at the 4% midpoint of its 2%-6% target band, given it is looking for support from the government in the form of fiscal measures.
Inflation may turn out to be a bigger risk for India than growth over the coming quarters, if not dealt with at this stage using various monetary policy tools, according to Deutsche Bank AG economist Kaushik Das. He sees inflation staying near the RBI’s upper tolerance limit if there are further shocks such as an erratic monsoon, which could disrupt farm output that accounts for a fifth of the $2.7 trillion economy.
Manufacturing companies’ expenditure on raw material increased 37% in the three months to December from a year ago, accounting for more than 63% of their total expenditure, an analysis from the central bank showed recently.
“We see our profitability come under stress,” said Shashank Srivastava, senior executive director for marketing and sales at Maruti Suzuki India Ltd., the nation’s largest car-maker. “We are watching the situation and not ruling out further prices hikes.” –Bloomberg