There’s something strange going on out there. Last Monday, Maruti Suzuki — that accounts for over 45% of cars manufactured in India — hiked its car and SUV prices ranging from Rs 7,500 to Rs 22,500. The average near-2% hike across models is the company’s third this year. Maruti said it was done to protect profitability in the face of rising commodity prices.
Cement companies too had increased prices at the end of June complaining of higher input costs of sand, lime, etc. Later, weak demand hit the manufacturers and they were forced to retreat, dropping prices by an average 3% to Rs 328 per 50Kg bag in August. Now, despite slow sales, these companies are again set to push up prices.
It’s the same story for manufacturers of white goods such as Sony, LG and Godrej Appliances. Phone handset makers like Vivo and Xiaomi increased prices by 3 to 5% in recent weeks complaining they were paying more for aluminum, copper, rubber and plastic inputs. The housing industry is battling poor demand and slipping prices, and yet paying more for steel, cement, marble slabs and other inputs.
It’s a piquant situation. As consumer-facing industries try and stoke up demand and work hard to generate buying, input costs continue to rise spoiling the party. Manufacturers, to protect margins, pass on the burden to consumers, but that is hitting demand and consumer confidence.
Global commodity prices gallop
From May onwards, steel makers have hiked the prices of Hot Rolled Coil (HRC) and Cold Rolled Coil (CRC) twice: first round in May by Rs 4,000 and Rs 4,500 per tonne, respectively, and then in June again by around Rs 2,000-2,500 per tonne. These price revisions jacked up prices around 10% to around Rs 69,000 per tonne for HRC and Rs 82,000 for CRC. Flat steel is a major input for auto and the construction industries, and major price changes are taking a heavy toll.
There are global challenges too. A report by the rating agency, Crisil, said the rise in input costs was due to a surge in prices of globally traded commodities, which are in turn raising manufacturing costs and fanning domestic inflation. Crude oil was up to $65 a barrel, double that of last year, edible oils are up 57%, the metals index is up by 76%, and transportation costs have surged.
As a result, wholesale price index (WPI) doubled April onwards with crude oil contributing the most to the rise in WPI. In the earlier months, producers bore the highest burden of rising input costs, compared to consumers. But in the later phase, what we are seeing now, as demand revives, these costs are being passed on to consumers.
Chip shortage hits autos
Strangely, a rising demand for electronics worldwide has created a shortage of components such as semiconductor microchips, battery packs and sensors. The problem has pushed up prices and has slowed down production of autos, and other electronic equipment that use micro-processors. Reuters survey a couple of months ago showed consumers had stocked up on laptops, gaming consoles and such items during the lockdowns leaving microchip stocks depleted. Sanctions against Chinese tech companies had exacerbated the crisis. In autos, the international shift from gasoline to electric cars is also contributing to the shortage. A modern petrol car uses around 300 chips; an EV uses as many as 3,000.
A week ago two big carmakers — BMW and Stellantis — joined the chorus warning that the semiconductor chip shortage would hit car production and sales through 2021 and could spill into the new year. Total production loss projected could be as high as 1.4 million vehicles this calendar year. Stellantis CEO Carlos Tavares described the shortage as “the big gorilla in the room.”
These factors — high prices of inputs and continued shortages — are acting together to extend the slowdown and crimp recovery. The second pandemic wave has seen to it that unemployment levels remain high and wages continue to languish below poverty levels. By June, this year, over 10 million Indians had lost their jobs because of the second wave of Covid-19, and around 97% of households’ incomes had declined since the beginning of the pandemic last year, according to data released by the Centre for Monitoring Indian Economy (CMIE).The unemployment rate is expected to come at 12% at the end of May as against 8% in April,”CMIE’s CEO Mahesh Vyas said.
Job losses, poor wages and with little cheer on the horizon totals to low consumer confidence. This in turn stymies demand and slams the breaks on recovery. What is simultaneously happening is industry, with low morale, is ignoring all calls by the government to bring in any fresh investment. All in all, a dangerous cocktail is feeding a prolonged slowdown.