Has the Budget brought prices down?

Has the Budget brought prices down?

New Delhi
March 10, 2008

The Budget 2008-09 was, among other things, meant to be anti-inflation with sundry excise and customs duty reliefs. So far, however, there is no evidence of prices of major commodities coming down as a result of the Budget. On the contrary, steel companies last week hiked prices by Rs 1,500-3 ,000 a tonne or 4-8 %.

Reliance Industries , which accounts for 70% of the Indian polymer market, too, revised polymer prices upwards, post-Budget . Ratan Tata has said the announced price of “people’s car” Nano was already very liberal and so, the excise relief would remain with Tata Motors. Drug price regulator says it will force pharma companies to slash prices of medicines whose prices it controls but the companies haven’t yet said they would cut prices of control-free medicines (80% of retail market) voluntarily.

In the Budget speech, the finance minister made a special effort to apprise the Parliament and the nation of the increased externalities of the price situation. “World prices of crude oil, commodities and food grains have risen sharply in the period April 2007 to January 2008.... prices of iron ore, copper, lead, tin, urea etc. are elevated. The prices of wheat and rice have increased in the world market by 88% and 15%, respectively ,” he said.

Mr Chidambaram added that management of the supply side of food articles would be the crucial task in the ensuing year. In addition, he also seemed (to many) to be doing his bit to control inflation through fiscal means. But in reality, was the budgetary assault on inflation genie strong enough?

Apart from the cut in general Cenvat rate (excise) from 16% to 14% or the reduction in duties on auto and pharma companies, there was no major fiscal measure in the Budget to suppress prices. (Cenvat rate cut is not relevant to food articles). In fact, some measures like income tax relief intended to boost consumption would push inflation more strongly than the cuts in indirect taxes would pull it down.

Chemicals and Petrochemicals Manufacturers’ Association reportedly said the new 5% import duty on naphtha for polymers would mean extra $160 million burden for India’s polymer makers, which would be passed on to consumers. An increase in plastic prices (thanks to the Budget ) is decisively inflationary as higher steel prices (despite the Budget) are.

High input costs are the stated and largely valid reason for price hike of commodities which are industrial inputs . It is another matter that some primary steel producers in India use the global “elevation” of iron ore prices reflected in part in the domestic (NMDC) price as an alibi to hike prices although they have captive iron ore mines (SAIL and Tata Steel buy very little iron ore) and are, to that extent, insulated from input price spiral .

Not to forget, however, the rising prices of other inputs for steel industry like coke, pig iron and scrap (whose import is now tax-free ).

At a general level, what the post-Budget behaviour of India Inc has demonstrated is the limited ability of fiscal measures (especially of the kind in the recent Budget) to control inflation driven by the rapid and inexorable rise in (globalised) commodity prices.

One contention could be that a Customs duty reduction would have helped more than excise cut to contain inflation. But given that imports of major industrial inputs (metals , chemicals etc.) are already taxed at rates lower than the peak rate, this argument, too, sounds rather flimsy. More useful would have been imposition of/hike in export duties on basic industrial inputs that are domestically available— iron ore, bauxite etc. for example. (The FM did hike the export duty on chrome ore by 50% and discouraged naphtha exports ). But that also can have only a marginal impact.

Says Abheek Barua, chief economist , HDFC Bank, “With the kind of enormous traction one sees in commodity prices across the globe, neither fiscal nor monetary measures would suffice to break down inflation . My guess is that inflation is likely to go all the way up to 6% soon. We need to reconcile to a stronger rate of inflation at the current juncture .”

With margins under pressure due to rising input costs, it is irrational to expect companies to pass on the excise relief to consumers, Barua noted.

The fact is Budget 2008-09 appreciated this and therefore did not attempt much to control inflation at the cost of high growth. The Budget would give a stimulus to consumption (and eventually investment), rather than contain inflation.

Ajit Ranade, chief economist at Aditya Birla Group says, “At the first place, the Budget was fiscally expansionary. Then the global crude prices went up to sub- $100 level to $106 now. So have the met coal prices risen. Steel majors cannot be faulted for the price increase.”

The question is whether Indian ought to tread the path of Europe and America which unequivocally prefer growth to inflation control. Maintaining high growth appears to be the preferred goal of India’s policymakers now. Coupling this chief objective with the other aim of minimising the adverse effect of growth on inflation is a far more difficult (if not impossible) task than what the policymakers would like to profess.

Over the years, India should have done far more to reduce its vulnerability to global prices of commodities—agricultural and industrial . It would have then had the weaponry to fight inflation.

">