Why India Inc must stop whining about interest rates and start cutting retail prices

India Inc is used to eating its cake and having it too. Right now, when demand conditions are weak, it has been seeking excise reliefs (the automobile companies got it, too), and is now baying for interest rate cuts. With every fall in the retail and wholesale prices indices, the calls get shriller.

Sorry, just as it takes two hands to clap, it takes two to bring prices down. Inflation cannot be brought down my fiscal and monetary policy alone, even though these two policies are critical to managing supply and demand equations effectively. After a lot of acrimony, the monetary and fiscal authorities are now back on talking terms. It’s time India Inc too joined the handshake.

As Govardhana Rangan writes in The Economic Times today (18 October), “the central bank believes companies are not doing enough to alleviate price pressures”. He quotes RBI Executive Director Deepak Mohanty as telling analysts recently: “Beyond a point, once the bottomline gets hit, the corporates also price their product in such a way that they prefer cutting down on their production rather than compromising on price. So that kind of oligopolistic behaviour also we have seen in the market.”

The message is clear: inflation can come down faster, giving room for rate cuts, provided India Inc is prepared to play its part to boost demand by cutting down on margins and retail prices.

Remember, automobile demand shot up after February this year when the government cut excise and the industry passed on the benefits to the consumer. But it does not need an excise cut to reduce inflation - for that has consequences for the fiscal deficit. Inflation can come down by accepting smaller margins and gaining from volume growth.

That industry is not doing its bit can be seen from what is driving the wholesale prices index (WPI). In September, the WPI printed at 2.38 percent, driven by a weakening of food and fuel prices. But guess what, manufacturing, which is 65 percent of the index, was much higher at 2.84 percent. In fact, as I have argued elsewhere, the road to zero-WPI inflation passes through the portals of India Inc.

What this suggests is that wholesale inflation is currently being held up by manufacturers refusing to cut prices in order to protect margins.

India Inc is trying to retain margins by cutting production rather than driving demand by lowering wholesale and retail prices and making up for it through higher volume growth instead.

This behaviour is not unlike the rent-seeking real estate industry, which, despite falling sales, is maintaining prices irrationally in order to protect ultra-high margins.

The margins mindset was echoed by Kishore Biyani of Future Retail, who ranted the other day against online retailer Flipkart’s huge discounts. He said: “How can someone sell products below its manufacturing price? This is legally not allowed in the country. Someone can do such undercutting only to destroy competition. Just because they have foreign funding, they can’t kill local trade like that.”

The government and the Competition Commission should turn a deaf ear to this special pleading. While no one needs to defend predatory pricing enabled by easy inflows of private equity capital, the point is this pressure is vital to get manufacturers to start cutting prices to realistic levels where demand can revive. In this sense, online retailers like Flipkart are doing us a service by creating consumer excitement.

Biyani also wears two hats. He is both a manufacturer of private labels, for which he has tied up with Amazon India for sales, and a retailer. He has done his bit for boosting demand by undercutting kirana shops through bulk sourcing of everyday necessities and organising regular discounts. So why is he protesting if someone else is pressuring prices downwards?

Quite clearly, India Inc has to move out of the high-margin mindset and start doing its bit for consumer demand. For example, when the automobile excise concessions end this December, if the auto industry immediately pushes up prices, it will be denting demand instead of growing it. When oil prices are down, consumers are in a mood to buy four- and two-wheelers, and it makes no sense to spoil the party by raising prices commensurate with the excise hike, when it happens.

To deserve lower interest rates, India Inc needs to put its shoulder to the wheel of demand too. The government and RBI cannot do all the heavy pushing and prodding. Industry must stop begging for concessions all the time.