For the past few months, Sreelekha Nambiar, a 38-year-old homemaker in Vashi, Navi Mumbai, has been wondering if seasonal shortages are driving up the prices of vegetables and groceries. The Rs 25,000 she sets aside for monthly household expenses has been getting her two-thirds of what she could buy a year ago. Vegetable prices are ruling at Rs 100-120 a kg in April compared to Rs 80-100 a year ago; cooking gas has become costlier by Rs 150, touching Rs 950 for a cylinder; and edible oil prices have jumped to Rs 200-220 a litre from Rs 80-100 a year ago. The Rs 22 a litre rise in petrol prices has made costlier her husband Satheesh’s daily commute to the internet services firm where he works as a technician. There is also an EMI for their 1BHK flat, plus school fees for their daughter. “It’s getting tougher to make ends meet,” Nambiar says, with their income of around Rs 60,000 a month.
Graphics by Tanmoy Chakraborty
Nambiar’s plight will sound familiar to millions of middle- and low-income households across the country, as the prices of all items of daily life—from food to fast-moving consumer goods, garments to shoes and cosmetics, cooking gas to petrol and diesel—have shot up. What hasn’t are incomes or job opportunities, making an already fraught existence even more perilous. The Covid-19 pandemic had robbed humanity of two productive years; Putin’s ill-conceived war on Ukraine that began on February 24 will ensure that the misery lasts even longer.
The international oil economy was the first to heat up. In India, fuel price hikes were kept at bay till the result of the assembly elections in five states were declared on March 10. Then the floodgates opened, so to speak. Breaching first the psychological barrier of Rs 100 a litre, petrol prices went up by Rs 10 a litre in a month’s time, touching Rs 120.51 in Mumbai (the highest ever) and Rs 105.41 in Delhi on April 9, while diesel also hit record levels at Rs 104.77 in Mumbai and Rs 96.67 in the national capital on the same day. The higher fuel prices had a cascading effect across the supply chain, making the production and transportation of goods dearer. Paying the price was the average consumer, their income already curtailed, now forced to further scale down their choices, if not give them up altogether.
Manufacturers are not having it easy either. They are battling the higher cost of inputs, with the prices of commodities such as steel, aluminium, copper and nickel having risen 10-15 per cent in the past few weeks. This is hurting their margins, while the higher transportation and insurance costs are exerting pressure on their cash flows to fund operations. There is mayhem in the construction sector too, as the rising prices of key building materials such as steel and cement have made the construction of homes and commercial buildings nearly 15 per cent costlier. This could lead to an appreciation in property prices this year, impacting demand for homes and offices.
“Inflation is a major worry. It is more a supply side pressure brought on by external factors. Policymakers need to go on active alert”
– D.K. SRIVASTAVA, Chief Policy Advisor, EY India
Retail inflation, meanwhile, skimmed the 7 per cent mark in March, threatening to undo the nascent rebound in economic growth following three waves of the Covid-19 pandemic. The Reserve Bank of India has resisted the urge so far to raise key policy rates—it did not do so in its recent monetary policy review though it did scale up its inflation projection to 5.7 per cent for FY23—but that resolve may not hold till the end of this financial year. The central bank has already revised its GDP growth projection for the current financial year downward to 7.2 per cent from its February forecast of 7.8 per cent.
Inflation has given the opposition parties fresh fuel to attack the Narendra Modi-led NDA government, with both Houses of Parliament seeing a disruption in proceedings over price rise. On March 31, Congress leader Rahul Gandhi garlanded a motorcycle and an LPG cylinder at Vijay Chowk in Delhi to protest the fuel price hike. Double-digit inflation is roiling the neighbourhood as well, contributing to political crises in Pakistan and Sri Lanka. “Inflation is a source of significant worry,” says D.K. Srivastava, chief policy advisor at EY India. “It is more a supply side or cost-push pressure (inflation on account of increased cost of wages and raw material), which has external roots. It is, therefore, not under the control of domestic policy instruments. Even when we try to raise interest rates, the economy won’t respond so quickly. Policymakers need to go on active alert.” If allowed to continue, he warns, the inflationary trend may become persistent and even gain momentum.
So, what’s fanning inflation?
Inflationary concerns began to mount about six months ago, driven largely by external supply factors. To begin with, there was the pandemic overhang. Then, China scaled down its steel production to meet its ambitious carbon goals. The shortage of semiconductor chips put tremendous pressure on the global auto industry, with waiting periods for new cars running into months. Russia’s war on Ukraine proved to be the proverbial straw that broke the camel’s back, aggravating supply chain bottlenecks, with months-long order backlogs in developing as well as developed countries. Sanctions by the US and the UK affected the global sales of Russian oil and gas, triggering volatility in prices. Russia is the world’s third largest producer and exporter of oil, after the US and Saudi Arabia, catering to 10 per cent of the world’s needs, supplying 27 per cent of Europe’s oil and meeting more than 40 per cent of its natural gas demand. Brent crude touched $139 per barrel on March 7, and has been skimming the $100-120 range since mid-March, posing the biggest risk to India’s economic prospects and putting global recovery at heightened risk. Though crude rates have eased since and were $102 a barrel on April 9, they are expected to remain high in the near future if there is no let-up in the war in east Europe.
Russia and Ukraine are also top exporters of major grains and vegetable oils—they account for a quarter of the world’s wheat exports, and close to 70 per cent of the world’s sunflower-seed oil exports. Wheat prices rose worldwide but it was in edible oils that India felt the impact, given its import dependency is almost two-thirds of total consumption.
Global commodity prices thus began heating up. The Bloomberg commodity index has spiked by around 10 per cent since the war began on February 24 and 52 per cent on a year-on-year basis (as on April 5) as supply concerns exacerbated. Gold prices crossed $2,000 per ounce on safe haven demand before some correction. Global food prices were at an all-time high in February 2022 and are expected to harden further in view of potential supply disruptions.
Reflecting world trends, India too saw steel, oil, nickel, copper and aluminium prices going up on an average 20-100 per cent. Cost of production in agriculture has gone up by 22 per cent in the past six months, but the increase in the minimum support price (MSP), meant to be a safety net for farmers, has only been in the range of 2-5 per cent for most Kharif crops.
Retail inflation had already surpassed the RBI’s upper limit of 6 per cent in January, as economies around the world opened up after two years of the pandemic. That had inched up to 6.07 per cent in February before the war in Ukraine, kicking off at month-end, spiked it up to 6.95 per cent in March, a 17-month high. “The global economic environment has altered drastically (since October, when the RBI last came out with its policy announcements), with the escalating geopolitical situation clouding the outlook for both growth and inflation in India and across the world, warranting a revision in forecasts,” the central bank said. “Amid persisting global supply chain disruptions, elevated energy and input prices and tighter labour markets, apprehensions of heightened global financial and commodity market volatility come together in a perfect storm.”
With inflation breaching targets, major advanced economies are unwinding their accommodative monetary policies. Stock markets have remained highly volatile, and currency prices have dipped compared to the dollar. Ditto for the rupee, which is trading at nearly Rs 76 to a dollar. Economists are warning of possible stagflation across the world—a scenario of low growth and high inflation. India, though, say top economists, is safe for the moment, as the underlying economic momentum is strong. But high energy prices remain a concern, as that makes it difficult to increase economic output. “The rise in energy prices is a headwind to growth, particularly as India imports 36 per cent of its energy needs and nearly half of its dense energy needs,” says Neelkanth Mishra, co-head of APAC strategy and India strategist at Credit Suisse (see accompanying Expertspeak).
Who is paying the price?
In the micro, small and medium enterprise (MSME) sector, prices of some key inputs have risen in the past two years, eroding the manufacturers’ profitability. The rise in the prices of brass, aluminium, steel and iron has been a death knell for Ajay Joneja, a Moradabad-based exporter of home décor goods, accent furniture and chandeliers to North America. “Commodity prices have gone out of control,” he says. After being stable between March 2018 and March 2020, prices have gone up by nearly 60 per cent. The increase in freight costs too has been exponential. In 2019, a container from Mumbai to Houston would cost $2,500 (around Rs 1.9 lakh); today, it sets you back by $12,000 (over Rs 9 lakh). “We have never seen anything like this,” says Joneja, who has two factories in Moradabad and an annual turnover of Rs 30 crore. “In earlier depressions, we saw an erosion of demand. Now, supply chains have been disrupted and freight rates have gone up.”
“Manufacturers enter into short-term contracts with buyers which have no clause for price escalation. The only alternative is to reduce their own margins”
– ANIL BHARDWAJ, Secretary-general, FISME
Mild steel prices have doubled to Rs 80,000 per tonne from just two years ago (see graphic: Prices of Major Commodities). Stainless steel and aluminium alloy prices too have doubled, while nickel costs have grown four-fold. The Ukraine war saw steel production halted at three of its mills, curtailing production of 18 MT steel, and impacting supplies to India. “Trouble is, manufacturers enter into short-term contracts with buyers, which have no clause for price escalation,” says Anil Bhardwaj, secretary general of the Federation of Indian Micro, Small and Medium Enterprises (FISME). This means they are unable to hike their prices even though their raw material costs have risen, as have transportation costs. With ships avoiding certain ports in eastern Europe due to the war in Ukraine, sea and air freight charges have increased significantly. “Worse, India does not have a global shipping line or port,” says Bhardwaj. There has been a 15-20 per cent increase in packaging costs alone.
Profit margins for firms are down by 50-70 per cent. Animesh Saxena, president of FISME and owner of Niti Apparel, LLP, bemoans the massive margin and bottomline pressure on MSMEs on account of rising input costs. Cotton prices, for instance, have gone up by nearly 100 per cent. Brass and copper are being sold like gold, says Joneja. Since the pandemic, a lot of purchases are being made cash down, especially by micro and small entrepreneurs. Capital gets blocked because of that and payment timelines get stretched from beyond 30 days to 60 and 90 days. MSMEs are also crying hoarse about cartelisation. Cotton spinners, for instance, are slated to see record profits in FY22, even as cotton prices doubled to breach the Rs 90,000 mark per candy of 356 kg since February 2021. Local cotton rates have exceeded global rates by as much as Rs 1,500-2,000 per quintal.
FMCG giant Dabur India claims it saw an increase of over 13 per cent in prices of raw materials, such as hydrocarbon derivatives, paper-based packing material, raw honey, edible oil and some key spices, in the third quarter of FY22. “We offset part of that inflationary impact through calibrated price increases of around 5 per cent in the third quarter itself in key products across health supplements, ayurvedic over-the-counter products, ethicals, hair oils and toothpaste,” says Mohit Malhotra, CEO, Dabur India. “The inflationary pressures and resultant price increases have led to consumers tightening their purse strings and relooking at discretionary purchases while also downgrading to smaller packs. The situation is extremely volatile due to the ongoing geopolitical environment and the pressure on margins remains. We are closely watching the situation and will undertake calibrated price increases, besides rolling out cost optimisation initiatives, to mitigate the inflationary pressures.” Meanwhile, automakers such as Hero MotoCorp, Tata Motors and other luxury carmakers have announced a realignment of their prices. On March 29, two-wheeler major Hero MotoCorp announced it will make an upward revision in the ex-showroom prices of its motorcycles and scooters in April.
How to beat inflation
So far, in its effort to spur growth in the pandemic-ravaged economy, the RBI had kept key policy rates unchanged. The central bank stuck to its stance in the April 8 monetary policy review. However, some experts are now asking if the RBI should take tougher measures like a hike in repo rates (rates at which the RBI lends to commercial banks) to rein in inflation. In fact, the central bank has signalled a gradual shift from its “accommodative stance” during the two years of the pandemic, which means it is preparing to curtail the money supply in the coming months, sacrificing growth. “In the sequence of priorities, we have now put inflation before growth,” Shaktikanta Das, RBI governor, said during the post-policy interaction with the media.
A concrete step the RBI did take in the recent policy review was to restore the policy rate corridor under the liquidity adjustment facility (LAF) to pre-pandemic levels. LAF is a tool the RBI uses that allows banks to borrow money through repurchase agreements or to give loans to the RBI through reverse repo agreements. “The RBI has thus signalled shifting focus from reviving growth to mitigating inflation risks,” says D.K. Joshi, chief economist with Crisil. The agency expects repo rates to go up by 50-75 basis points in FY23.
Others argue that there is not much governments can do when it comes to “imported inflation”, which is slated to remain high as economies spring back to normalcy after two years of Covid while uncertainties over the Ukraine war persist. What the government can do is to ease supply bottlenecks or extend succour to households and manufacturers to tide over the period of high prices. MSME players, for instance, are asking for income tax sops and GST reduction. The Centre as well as the states can reduce the excise duties on fuel, so that the public does not bear the entire burden of high crude prices. Increasing MSP and keeping fertiliser prices in check can help farmers ease the food price shock. Many expect the free food scheme to continue and food subsidy to exceed budget estimates. To control food prices, the government could look at open market sales of FCI’s (Food Corporation of India) stock of wheat and rice—both much above buffer norms. This could reduce the pressure from higher MSP to retail food prices and lower the cost of storing large amounts of stock. It could also consider a price stabilisation scheme if the food price shock spreads beyond cereals, give agricultural exports, particularly wheat exports, a push to take advantage of the elevated global prices.
Srivastava believes the government’s tax finances have done well and the trend is likely to continue into the current fiscal. “The government has the fiscal space to accommodate reduction in excise duties and state governments have the scope to reduce VAT on their petroleum products. This would have a positive impact on consumer budgets and consumption expenditure would go up,” he says. Nilesh Shah, managing director of Kotak Mahindra Asset Management Co, says the focus should be on increasing productivity. “If we manage the supply side, it will be transitory inflation,” he says. India also needs to press its case with the US to allow it to buy discounted oil from Russia and Iran, he adds. If Russian and Venezuelan oil comes to the Indian market, it could ease things up. But India also has to be prepared for the worst—a scenario where the war continues, the oil does not come to the market and crude touches $200 a barrel.
On April 12, the war in Ukraine entered its 47th day, scarcely the swift operation Putin had hoped for. As the cloud of uncertainty loomed over global markets, it cast a shadow on India as well, threatening to undo all its inflation assessments. India must think ahead and plan for the worst so that the country and its people can escape a prolonged inflation coma.
Feeling The Heat
Sandeep Parikh, 61, businessman, Mumbai; (Photo: Milind Shelte)
In the 35 years that he has been in business, Parikh, owner of Esjay Industries, a steel fabrication firm in Thane’s Wagle Industrial Estate which supplies to firms such as Larsen & Toubro for the defence segment, has never faced such a situation. The prices of basic raw materials— mild and stainless steel—have doubled in just two years. Mild steel, which cost Rs 40,000 a tonne two years ago, costs Rs 80,000 now. Prices of other consumables such as welding rods and industrial oxygen have gone up between 40 and 75 per cent. Parikh is in a fix because he cannot pass on the hikes to his customers. “Our customers take time to absorb the increase in our selling price. Even if we raise prices, it is marginal and not prorata, which means we lose money,” says Parikh, who is also president of the Chamber of Small Industry Associations (COSIA), an apex body of MSME organisations. Firms such as his then have to trim margins, or simply give up the business, which spoils relations with the client. He wants the government to reduce GST and provide tax sops to MSMEs.
Stretching Their Budget
Shailesh Kumar, 52, financial advisor, Patna; (Photo: Ranjan Rahi)
Of their monthly income of Rs 75,000, Kumar and his homemaker wife Manorama set Rs 65,000 aside for their household needs. Much of this goes towards the Rs 18,000 EMI they pay on their Rs 20 lakh home loan, the Rs 12,000 school fees for their two children and the remainder on groceries, phone and power bills and fuel. It leaves the couple with very little to save. Of late, their expenses have risen by 30 per cent. “We need Rs 1,000 every day just to meet our daily household expenses,” says Kumar. The couple have cut down on all unnecessary travel, even if it means not attending a wedding or social function, or not buying clothes during festivals. Even watching a movie in a theatre has become a luxury. Kumar can afford to buy a car, but given the rising fuel costs, he has decided to retain his Bajaj Platina motorbike. Kumar wants petrol to be brought under GST so that its cost can come down. He also laments that the past few budgets have not accorded any tax relief to people like him. They want our votes but don’t address our woes, he says.
— Amitabh Srivastava
Shrinkhala Dixit, 38, make-up artist, Lucknow; (Photo: Maneesh Agnihotri)
Owner of a beauty parlour in Lucknow’s Gomti Nagar area, Dixit has been finding it difficult to support her family of four on her monthly income of Rs 80,000. Their monthly household expenditure has jumped 25 per cent to Rs 75,000 in a year. The rise in the prices of pulses, vegetables and consumer goods apart, the things that she needs for her business have also become costlier. Waxing kits, for example. Their cost has gone up from Rs 900 per kit earlier to Rs 1,200 now. However, while her expenses have increased, Shrinkhala’s income has not; if anything, business has been lacklustre in the wake of the pandemic. “Some of my clients have stopped coming because they think make-up is now a luxury,” she says. She has a car but the high fuel prices are a deterrent. “I want the government to reduce fuel prices and control the prices of essential goods,” she says.
— Prashant Srivastava
Raw Material Woes
Harjeev Singh Chawla, 38, Partner, AVH Associated, Noida
Business had barely begun picking up two years after the pandemic when the spiralling cost of raw materials dealt another blow to Chawla’s company, which designs, manufactures and exports decorative home textiles to 70 countries. “In the past year or so, we have seen an 80 per cent increase in cotton prices,” he says. “Even suppliers say they have not seen such a quick rise in prices. You will get a kilo of cotton for Rs 300 one day and Rs 320 the next.”
Dealing a double whammy is the disruption in raw material supplies from China owing to the country’s zero Covid policy. Citing an example, Chawla says while dyed nylon thread is made in India, the raw material comes from China. It has killed any hope he had of cashing in on the anti-China sentiment following the Galwan standoff. The war in Ukraine has aggravated several pain points—from logistics to packaging to cost of polyester fibre—costs for all have escalated by 80-100 per cent in the previous quarter. To tide through the crisis, Chawla is taking a massive cut on margins; and increasing the prices of his products by 7-10 per cent. But that is leaving his customers unsure. “They have cut down orders by half,” Chawla laments. It’s a lose-lose situation.
— Shwweta Punj