Imported inflation: A new hurdle in India's growth path

Rising prices to affect consumer demand and investments

by Manasi Swamy

A new obstacle of imported inflation has surfaced in the growth path of the Indian economy which is already struggling with weak demand and the adverse effects of demonetisation. Commodity price cycle in the international market has turned around. Prices of almost all major commodities including crude oil, natural gas, steel, aluminium, rubber, cotton, palm oil and groundnut oil have started coming off their lows. Coal prices, which had spiked last November, are still ruling much higher than their pre-October levels. Additionally, the Indian rupee continues to depreciate year-on-year against the US dollar.

India is importing inflation from abroad and it has started feeding into the domestic price movement. Official statistics of wholesale prices in India, released yesterday, show that inflation spiked from 3.7 per cent in December 2016 to 5.3 per cent in January 2017 and rushed further ahead to 6.6 per cent in February 2017.

The sharp increase in headline inflation in the last two months has come entirely from the fuel and the primary articles group. Oil marketing companies hiked prices of their offerings in the range of 5 to 20 per cent since December 2016 in order to pass on the increasing burden of crude oil prices to the consumers. Coal India too hiked coking coal prices by a minimum of 20 per cent from 13 January 2017.

Besides, prices of fruits and vegetables that had crashed due to excess supply, broken supply chains and a fall in purchasing power due to demonetisation, have started recovering.

The manufacturing sector (excluding petroleum companies), however, has not passed on the burden of rising input costs to the consumers yet. Inflation in this group, in fact, has inched down from 3.8 per cent to 3.7 per cent in the last two months.

The sector has managed to hold the price line so far, as most manufacturing companies maintain raw material inventories worth two months of consumption. But, the producers are soon approaching a catch-22 situation. The dilemma is - to hike the prices or not to hike the prices? And, whichever choice they make, the Indian economy is bound to suffer.

The economy is currently stuck in a vicious cycle of low demand - low capacity utilisation - weak investment activity - lack of fresh job creation - low demand. Two consecutive years of drought and lack of a big fiscal push from the government has made the economy settle down for an equilibrium lower than its potential.

In this situation, if the manufacturing companies decide to pass on the pressure of rising input costs to the consumers, the subsequent rise in inflation will stall or at least prolong its recovery from the shock of demonetisation.

If inflation in the manufacturing sector starts rising, which is more stubborn than the inflation in fuel or agro-commodity prices, the RBI will have to reverse the interest rate cycle, which can hinder the recovery further. The apex bank has put a pause on the monetary easing since September 2016 and has recently announced a shift in its monetary stance from accommodative to neutral. Also, a US Fed rate hike is in the offing.

If the manufacturing companies do not hike prices and decide to absorb the entire burden of rising input costs, their profitability will get affected. Net profit margin of manufacturing companies (excluding petroleum) has almost halved to four per cent in the last five years. Consequently, returns on capital employed (ROCE) have also dropped from five per cent to 2.5 per cent. Any more burden on their profitability will further bring down their ability and willingness to invest in capacity creation. If companies do not invest, the Indian economy is unlikely to rise from the low equilibrium level that it has currently settled at.

Thus, the recent increase in international commodity prices has become an additional hurdle in the growth trajectory of the Indian economy.

Unemployment Rate
Per cent
4.3 -0.1
Consumer Sentiments Index
Base September-December 2015
92.4 0.0
Consumer Expectations Index
Base September-December 2015
94.8 0.0
Current Economic Conditions Index
Base September-December 2015
88.7 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Mar 16 Jun 16 Sep 16 Dec 16
New projects 3.31 1.54 2.34 1.41
Completed projects 2.27 0.90 2.17 0.85
Stalled projects 1.04 1.32 0.39 0.79
Revived projects 0.62 0.43 0.51 0.17
Implementation stalled projects 0.92 0.50 0.58 0.80
Updated on: 28 Mar 2017 8:20PM
Quarterly Financials of Listed Companies
(% change) Mar 16 Jun 16 Sep 16 Dec 16
All listed Companies
 Income -0.2 -0.9 2.1 6.3
 Expenses 0.8 -0.3 1.9 6.7
 Net profit -29.7 -4.1 14.6 36.2
 PAT margin (%) 4.9 6.9 6.9 6.0
 Count of Cos. 4,452 4,409 4,366 4,313
Non-financial Companies
 Income -2.2 -2.5 0.6 6.1
 Expenses -4.0 -2.9 -0.2 7.6
 Net profit 3.9 9.6 26.6 20.3
 PAT margin (%) 6.1 7.4 6.9 6.1
 Net fixed assets 3.8 -9.2
 Current assets 3.0 8.1
 Current liabilities 10.6 11.6
 Borrowings 6.7 3.1
 Reserves & surplus 7.8 8.4
 Count of Cos. 3,485 3,456 3,424 3,394
Numbers are net of P&E
Updated on: 28 Mar 2017 8:28PM
Annual Financials of All Companies
(% change) FY13 FY14 FY15 FY16
All Companies
 Income 11.9 9.4 4.7 0.6
 Expenses 12.1 9.3 4.7 0.8
 Net profit 1.1 -4.2 3.4 -13.0
 PAT margin (%) 3.6 3.2 3.3 3.2
 Assets 14.1 12.3 9.0 7.9
 Net worth 9.5 9.5 8.3 6.4
 RONW (%) 6.8 6.0 6.2 5.5
 Count of Cos. 23,431 20,686 19,475 15,131
Non-financial Companies
 Income 11.1 9.0 3.7 -0.6
 Expenses 11.4 8.7 3.8 -1.4
 Net profit -8.7 -5.6 -2.2 12.8
 PAT margin (%) 2.4 2.1 2.2 2.9
 Net fixed assets 12.8 11.3 12.4 11.0
 Net worth 7.8 8.4 6.8 5.4
 RONW (%) 5.5 4.8 4.9 5.9
 Debt / Equity (times) 1.1 1.1 1.1 1.0
 Interest cover (times) 2.0 1.9 1.9 2.1
 Net working capital cycle (days) 71 69 68 69
 Count of Cos. 18,019 16,227 15,305 12,140
Numbers are net of P&E
Updated on: 20 Mar 2017 1:24PM

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