Indian Manufacturing in the Era of Hyper-Inflation: ASSOCHAM study

Mumbai, Oct 21, 2010 (Washington Bangla Radio / pressreleasepoint) The prolonged hyperinflation regime has so far been exerting maximum pressure on the country’s manufacture sector. However, this can’t be taken for granted for long time: The Associated Chambers of Commerce and Industry of India (ASSOCHAM) cautions.

“Even as the prices of primary articles and energy inputs continue to push headline inflation to new heights ever since the economic recovery started taking place in the early 2009,  the rise in the prices of manufactured products, particularly that of non-food manufactured products, has not been commensurate to pass on the effect of inflation to the consumers and as a result the manufacturing sector of the country is  taking burden on to it. If this trend continues India would not be able to sustain its present rate of growth as its main driving force in the recent past would run out of steam” said Dr. Swati Piramal, President, Assocham.

According to the Assocham Eco Pulse (AEP) Study titled“Indian Manufacturing in the Era of Hyper-Inflation”, the continued hyper-inflation has forced the Indian manufacturing sector to resort to stringent cost cutting measures. The much higher increase in the prices of manufacturing inputs like primary products, wages and fuel as compared to that of manufactured products have been eroding the price cost margins of firms. Stimulus measures that were found helping the sector initially to cope up with this problem has lost much of their relevance owing to their withdrawal to a large extent. Now, with the fears of double dipped recession gradually gaining in the world economy, there are questions on the sustainability of remarkable performance that the manufacturing sector has been performing in the recent past. The ASSOCHAM cautions both the policy markers and the industry about the impending serious growth hurdles.

Table – Detailed Inflation Trends

Weights (base: 2004-05)  2009-10  2010 (April-Sept)
1. Primary articles 20.12  12.7  19.0
     1.a Food articles  14.34  15.2  18.5
     1.b. Non-food articles 4.26  5.6  16.4
     1.c Minerals  1.52  10.7  27.6
2. Fuel, Power, Light & Lubricants  14.91  -1.7  13.1
3. Manufactured Products  64.97  1.8  5.5
     3.a Food Products  9.97  13.5  5.9
     3.b.Beverages, Tobacco & its products  1.76  6.1  7.0
     3.c Non-food Manufacturing Inflation  53.24  -0.2  5.4
4. Overall WPI ( Headline Inflation) 100  3.6  9.8
Source: Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India.

The year-on-year inflation rates given in the above table show that the prices of primary articles that had started picking up in the wake of expected economic recovery in 2009 continued with that trend in the current fiscal as well. Prices of the main inputs of manufacturing sector, the primary articles, increased by 19.0 percent in the first six months of the current fiscal on year-over-year basis. Higher prices of primary articles, especially rise in food prices, indirectly also effects the production by first pushing up the cost of living which, makes labour to ask for wage hikes and higher wage costs will in turn result in soaring cost of production. As for the fuel inflation, it has also registered 13.1 percent in the first half of the current fiscal as against a negative growth in the corresponding period of the previous year. Thus, if you consider manufacturing as the process of transforming primary articles into finished products by working on them with the help of labour and machines that work on fuel, all the three major operating costs of manufacturing sector viz., raw material cost, labour and fuel costs are all increased owing to persistence of higher inflation rates.

On the other hand, ASSOCHAM points to the fact that the prices of manufactured products increased by 5.5 percent in the current fiscal on year over year basis as compared to 1.8 percent in the previous year. Not only that there is a much lower aggregate price rise for manufactured products but also the prices of manufactured food products have actually registered lower growth in the current fiscal on year-over-year basis. This forms a challenging scenario for the country’s manufacturing sector. The challenge is in the form of performing in the era of lower price-cost margins.

If we understand the performance of the manufacturing sector in the country, most of the manufacturing firms have actually successfully managed to overcome this situation. They resorted to severe cost control exercises for achieving increased operational efficiency which, actually help offset higher raw material prices and poor demand conditions in the international markets.

However, in the long run if the cost of production continues to be high and there is no matching output price realization the manufacturing sector will see subdued investment activity and hence diminished scope for growth in manufacturing output. This is augurs bad to the economy as the country will face scarcity of many of its critical requirements.

The Way Out

The major draw back of the country’s inflation control strategy is that it always considers inflation as a seasonal and temporary problem. Monsoon failure has always been dubbed as the main cause of inflation. Besides the domestic climatic conditions, external market conditions have also been seen as another major cause of inflation. The government has very insignificant or no control on these factors. However, actually, a host of medium to long term factors also play major role in inflation control, which can be controlled by the government.

One such measure is improving the farm productivity and closing the agriculture infrastructure gap. There is a huge gap between the technology available and used. The gap needs to be reduced. Proper irrigation and storage facilities need to be created by making adequate investment in these infrastructure capacities.

According to ASSOCHAM, presently there exists a huge gap between the price received by the producer and the price paid by the consumer. This gap needs to be filled by creating transport and storage infrastructure to the required extent. The government needs to regulate the functioning of the agriculture markets.

In this backdrop, the government needs to formulate suitable measures that offset the drawbacks faced by the manufacturing sector. Also, the inflation control exercise must be prepared keeping the developmental credit needs of this sector. Withdrawal of stimulus measures and the anti-inflationary measures pushing up the cost of credit to prohibitive levels actually contribute to the fall of manufacturing activity in India.

- pressreleasepoint